In today's edition, a look at how the cops on the beat policed SVB and how that contributed to its f͏ ͏ ͏ ͏ ͏ ͏
with Liz Hoffman
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Hi and welcome back to Semafor Business, a twice-weekly newsletter from Bradley Saacks and me.
“It failed because of its management.” That’s Fed Vice Chair Michael Barr succinctly deflecting blame for the collapse of Silicon Valley Bank and the ensuing mini-crisis in the U.S. banking sector.
The finger-pointing started in earnest this morning, when Barr, FDIC Chair Martin Gruenberg, and Treasury undersecretary Nellie Liang testified before the Senate in the first congressional grilling of regulators about SVB’s failure. It’s likely to continue for months and become a proxy war for broader political fights over regulation, risk, and, yes, the culture wars. Sen. Tim Scott accused regulators of being “asleep at the switch,” and specifically questioned whether the San Francisco Fed was spending too much time on climate change and too little on bank supervision.
Today I take a look at the blame game and why there might not be an easy fix. Plus, vaccine profits revisited, Fed-speak spooking the markets, AI antitrust, and the M&A on Succession.
➚ BUY: White knights. First Citizens shares rose 54% yesterday after it bought most of Silicon Valley Bank from the government, which is keeping SVB’s bad investments and eating at least $16.5 billion of paper losses. That followed a 32% pop for New York Community Bank after it rescued Signature Bank last week. Investors see sweetheart deals.
➘ SELL: Black gold. Oil prices are down 40% since the summer, when Russia’s war sparked fears of a shortage. The U.S. government would like to be a buyer at these prices, but Energy Secretary Jennifer Granholm told Congress that maintenance work at two big storage sites would prevent Washington from refilling its reserves this year.
Change in annual revenue that BioNTech expects from the COVID-19 vaccine it marketed with Pfizer, the most widely administered shot in a world that is moving on. In a sign that it has also turned the page, Pfizer just plowed its pandemic profits into a $43 billion takeover of Seagen, which Pfizer CEO Albert Bourla called “the goose laying the golden eggs” because of its promising cancer treatments.
Win McNamee/Getty Images
In late 2021, U.S. banking regulators alerted executives at Silicon Valley Bank to a problem: Federal Reserve officials weren’t sure the bank could keep funding its operations if investor confidence wobbled.
Supervisors were back a few months later, this time with criticisms of SVB’s board oversight and internal audits. Over the summer, they were alarmed enough to formally decide that SVB was no longer “well managed.” And twice in the fall, they took their concerns in person to SVB’s top brass.
This timeline is laid out in congressional testimony this morning by the Fed’s senior bank-supervision official, Michael Barr. It makes clear that while SVB’s shoddy risk management, which took down the company and sparked panic across the U.S. banking sector, might have been a surprise to its depositors and investors, it was well-known to the watchdogs in charge of preventing it.
And so the finger-pointing over who’s to blame began in earnest this morning, when Barr and the head of the Federal Deposit Insurance Corp., Martin Gruenberg, defended their actions in front of Congress.
The two main culprits, aside from SVB’s executives — who may yet answer to SEC chief Gary Gensler about their decision to sell huge chunks of stock in the days leading up to the bank’s collapse — are regulators and supervisors. In other words, were the rules too lax, or were those in charge of enforcing them asleep at the switch?
It’s too soon to know for sure. But as I wrote about last week, the argument that this could have been averted if banks the size of Silicon Valley — big but not giant — had been subject to the same capital requirements and annual stress tests as the JPMorgans and Citigroups of the industry, falls flat.
For starters, in the doomsday scenarios cooked up annually to test banks’ health in a crisis, real interest rates fall. That means the current mess, sparked by a brisk rise in borrowing costs, wouldn’t have been picked up.
It’s fair to discuss where the line should be for tougher regulation — at $100 billion of assets, or $250 billion, or $700 billion. I’m a reluctant defender of Too-Big-to-Fail banks, on the theory that you want all the risk where you can see it and get all the CEOs in a room and dictate terms.
But the consensus seems to be that we want medium-sized, regional banks in this country, providing a custom service to a community whose needs aren’t well met by the biggest banks. Short of treating those medium-sized banks like giants, which would make loans for small businesses all across the country more expensive, I don’t think there’s a regulatory fix for this problem.
But the tinder was there, and should have been clear to supervisors, especially those at the San Francisco Fed who are closest to SVB.
The bank had huge concentration risk, catering almost exclusively to startups and their venture backers. It had huge market risk, in a $160 billion portfolio of loans and investments that were increasingly underwater as interest rates rose. And it had huge run-on-the-bank risk; more than 90% of its deposits exceeded the $250,000-per-customer FDIC insurance cap, making them especially flighty. Gruenberg noted in his congressional testimony that the 10 largest deposit accounts at SVB held a total of $13.3 billion.
ROOM FOR DISAGREEMENT
A group of Democratic lawmakers think tighter regulation is the place to start. Elizabeth Warren and Katie Porter introduced a bill to repeal a Trump-era law that exempted lenders the size of Silicon Valley Bank from certain capital rules.
“These recent bank failures are the direct result of leaders in Washington weakening the financial rules,” Warren wrote in The New York Times.
- With Barr’s testimony now on the record, this New York Times story about how Fed officials warned SVB of deficiencies has aged well.
- SVB hired BlackRock consultants in 2020 to run risk-management scenarios and received a “gentleman’s C,” according to the FT. BlackRock warned executives that the firm’s risk controls were “substantially below” peers.
Markets tend to perk up when the Federal Reserve makes its interest-rate announcements, then quickly calm down as traders digest the news and move on. But lately, the fireworks have only really gotten going once Jerome Powell starts talking a half-hour later.
Market jitters aren’t necessarily bad (there’s a buyer for every seller, of course). But there’s a widening gap between the message the Fed thinks it’s sending and what the market is hearing, which could erode the one thing the central bank can’t function without: credibility.
- Hitting where it hurts: English football club Chelsea blamed sanctions against Russian oligarchs, including its former owner and Russian President Vladimir Putin ally Roman Abramovich, for a £120 million annual loss. The club couldn’t sell merchandise or tickets to top matches for months while it finalized a sale to a group led by U.S. financier Todd Boehly last May.
- Equal opportunity to rule us all: “We need to be very vigilant to make sure that [artificial intelligence] is not just another site for the big companies becoming bigger and really squelching rivals,” U.S. Federal Trade Commission Chair Lina Khan said at a conference Monday, warning tech giants against trying to monopolize AI. Her comments preview the next front in the battle between antitrust regulators and Silicon Valley. Facebook parent Meta recently beat back an FTC challenge to its takeover of a virtual-reality startup, while ChatGPT-backer Microsoft is currently fighting the watchdog over its $69 billion purchase of Activision.
Miller Whitehouse-Levine is CEO of DeFi Education Fund, which advocates on behalf of decentralized finance companies.
Hope springs eternal: Western banks have struggled for years to make money in China, but Crédit Agricole thinks it can succeed. France’s second-biggest bank is launching a new venture to do deals and raise money on the mainland.
China has been the next big thing in finance for decades, but never quite delivers. Regulations favor domestic banks and fees are a fraction of what Wall Street firms can earn catering to western clients. It was only in 2021 that the Chinese arms of big global banks finally started turning profits, and meager ones at that, according to the Financial Times.
It took 19 years, but the Boston takeover of Bank of America is symbolically complete. Brian Moynihan, a veteran of FleetBoston who joined Charlotte-based Bank of America when the two merged in 2004, and became the company’s CEO in 2010, lives in Wellesley, Mass., and commutes south when needed, a setup that has rankled Southern old-timers.
Yesterday BofA said it would take over sponsorship of the Boston Marathon from a hometown heavyweight, insurer John Hancock.Reuters/Evelyn Hockstein
We need to talk about the M&A on Succession. Sunday’s premiere sees Logan Roy facing off with his kids to buy Pierce Media, and I’m sorry but the bidding process is insane. I realize it’s fiction but there is a reason doctors find most hospital dramas infuriating.
First of all, there isn’t a lawyer in the room. (Who is Tellis? What is his job?). Second, I don’t think it’s ever made explicit, but Pierce is some combination of The New York Times, The Wall Street Journal and Graham-family-era Washington Post, so I assume it’s publicly traded. And yet the bidding is on what I can only assume is an enterprise-value basis, rather than a per-share basis, and seems to go up by $1 billion at a time.
This is the worst M&A depiction since the third season of The Newsroom — yes, I watched it — when Sloan Sabbith deduces that Atlantis is about to get a hostile bid by looking at her Bloomberg terminal. I’m holding out some hope that episode two includes some discussion of financing.HBO
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— Liz and Bradley