Greg Becker sat in a red armchair at an invite-only conference in Los Angeles last week, legs crossed, one hand cutting through air.
“We pride ourselves on being the best financial partner in the most challenging times,” SVB Financial Group’s chief executive officer told the Upfront Summit on March 1, a day before his firm was up for Bank of the Year honors at a London gala.
Just a week later, it all fell apart.
SVB’s collapse into Federal Deposit Insurance Corp. receivership came suddenly on Friday, following a frenetic 44 hours in which its long-established customer base of tech startups yanked deposits. But its fate was sealed years ago — during the height of the financial mania that swept across America when the pandemic hit.
US venture capital-backed companies raised $330 billion in 2021 — almost doubling the previous record a year before. Cathie Wood’s ETFs were surging and retail traders on Reddit were bullying hedge funds.
Crucially, the Federal Reserve pinned interest rates at unprecedented lows. And, in a radical shakeup of its framework, it promised to keep them there until it saw sustained inflation well above 2% — an outcome that no official forecast.
SVB took in tens of billions of dollars from its venture capital clients and then, confident that rates would stay steady, plowed that cash into longer-term bonds.
In doing so, it created — and walked straight into — a trap.
Becker and other leaders of the Santa Clara-based institution, the second-largest US bank failure in history behind Washington Mutual in 2008, will have to reckon with why they didn’t protect it from the risks of gorging on young tech ventures’ unstable deposits and from interest-rate increases on the asset side.
Outstanding questions also remain about how SVB went about navigating its precarious position in recent months, and whether it erred by waiting and failing to lock down a $2.25 billion capital injection before publicly announcing losses that alarmed its customers. Investors and depositors tried to pull $42 billion on Thursday, leaving the firm with a negative cash balance of almost $1 billion, regulators said.
Still, decades of declining interest rates that started in the early 1980s — when SVB was founded over a poker game — made it heresy among market pros to suggest bond yields could climb without roiling the economy. As it turns out, American consumers are doing just fine, with jobs aplenty.
It’s banks, especially smaller ones that are flying below the Fed’s radar, that are now looking like the weakest links. SVB stands as the most extreme example yet of how Wall Street has been blindsided by the dynamics of the global economy after the Covid-induced shock.
Investors aren’t waiting to find out which institution might be next, with the KBW Bank Index dropping the most in a week since March 2020.
At SVB, “there was a lot of risk they were taking on that other banks wouldn’t,” said Sarah Kunst, a managing director at venture capital fund Cleo Capital. “That ultimately was part of their demise.”
In March 2021, SVB had what might be considered an enviable problem: Its clients were flush with cash in a big way.
The bank’s total deposits exploded higher over the prior 12 months, to about $124 billion from $62 billion, according to data compiled by Bloomberg. That 100% surge far outpaced a 24% increase at JPMorgan Chase & Co. and a 36.5% jump at First Republic Bank, another California institution.
“I always tell people I’m confident I’ve got the best bank CEO job in the world, and maybe one of the best CEO jobs,” Becker said in a May 2021 Bloomberg TV interview.
When asked if the bank’s recent run of growing revenue was sustainable, Becker, who joined SVB in 1993, smiled and spoke the lingo of tech visionaries.
“The innovation economy is the best place to be,” he said. “We’re very fortunate to be right in the middle of it.”
Still, the FDIC only insures bank deposits of up to $250,000 — and SVB’s clients had much more. That meant a large share of the money stashed at SVB was uninsured: more than 93% of domestic deposits as of Dec. 31, according to a regulatory filing.
For a while, that exposure didn’t raise any red flags. SVB easily cleared regulatory hurdles assessing its financial health.
But beneath the surface were severe losses on long-term bonds, snapped up during that period of rapid deposit growth, that had been largely shielded from view thanks to accounting rules. It had mark-to-market losses in excess of $15 billion at the end of 2022 for securities held to maturity, almost equivalent to its entire equity base of $16.2 billion.
Still, after the bank’s posted fourth-quarter results in January, investors were sanguine, with a Bank of America Corp. analyst writing that it “may have passed the point of maximum pressure.”
It soon became clear that wasn’t the case.
In a meeting late last week, Moody’s Investors Service had bad news for SVB: the bank’s unrealized losses meant it was at serious risk of a credit downgrade, potentially of more than one level, according to a person familiar with the matter.
That put SVB in a tough spot. To shore up its balance sheet, it would need to offload a large portion of its bond investments at a loss to increase its liquidity — potentially spooking depositors. But standing pat and getting hit with a multi-notch downgrade could trigger a similar exodus.
SVB, along with its adviser, Goldman Sachs Group Inc., ultimately decided to sell the portfolio and announce a $2.25 billion equity deal, said the person, who requested anonymity to discuss internal deliberations. It was downgraded by Moody’s on Wednesday anyway.
At the time, large mutual funds and hedge funds indicated interest in taking sizable positions in the shares, the person said.
That is, until they realized how quickly the bank was hemorrhaging deposits, which only got worse on Thursday after a number of prominent venture capital firms, including Peter Thiel’s Founders Fund, were advising portfolio companies to pull money as a precaution.
Around that same time, on Thursday afternoon, SVB was reaching out to its biggest clients, stressing that it was well-capitalized, had a high-quality balance sheet and “ample liquidity and flexibility,” according to a memo viewed by Bloomberg. Becker had a conference call in which he urged people to “stay calm.”
But they were already too late.
SVB “should have paid attention to the basics of banking: that similar depositors will walk in similar ways all at the same time,” said Daniel Cohen, former chairman of The Bancorp. “Bankers always overestimate the loyalty of their customers.”
A vice president, in one call with a public company client, seemed to stick to a script and gave no new information, according to a person on the call.
That client decided to move a portion of their cash to JPMorgan to diversify assets Thursday; the transaction took two hours to navigate on SVB’s website and is still marked as “processing.”
The same client tried to move a larger amount on Friday morning, but no attempts to wire the money worked, the person said.
The collapse on Friday happened in the span of hours. SVB abandoned the planned equity raise after shares tumbled more than 60% on Thursday. By that point, US regulators had descended upon the bank’s California offices.
SVB “didn’t have nearly as much capital as an institution that risky should have had,” William Isaac, the former chairman of the FDIC from 1981 to 1985, said in a telephone interview Friday. “Once it started, there was no stopping it. And that’s why they just had to shut it down.”
Before noon in New York, the California Department of Financial Protection and Innovation closed SVB and appointed the FDIC as receiver. It said the main office and all branches would reopen on Monday.
By then, it’s SVB’s goal to find a buyer and complete a deal, even if it requires selling the company’s assets piecemeal, according to a person familiar with the matter.
Startup founders, meantime, are worrying about whether they’ll be able to make payroll. The FDIC said that insured depositors would have access to their funds by no later than Monday morning.
The amount of SVB deposits in excess of the $250,000 insurance cap: “undetermined.”
–With assistance from Sridhar Natarajan, Sarah Frier, Crystal Tse, Amelia Pollard, Max Reyes, Gillian Tan, Max Abelson, Sonali Basak, Katie Roof, Jenny Surane and Kailey Leinz.
Fortune‘s CFO Daily newsletter is the must-read analysis every finance professional needs to get ahead. Sign up today.