The problems that triggered SVB Financial Group Inc.’s death spiral were hiding in plain sight in the firm’s earnings reports.
That’s according to short seller William C. Martin, who warned his Twitter followers about the balance-sheet issues for almost two months before the parent of Silicon Valley Bank blew up in the blink of an eye this week.
The tweets started on Jan. 18, the day before SVB reported earnings, when Martin’s account posted a prescient thread that began: “Investors have rightfully been fixated on $SIVB’s large exposure to the stressed venture world, with the stock down a lot. However, dig just a little deeper, and you will find a much bigger set of problems at $SIVB.”
Silicon Valley Bank $SIVB reports earnings tomorrow— Raging Capital Ventures (@RagingVentures) January 18, 2023
Investors have rightfully been fixated on $SIVB's large exposure to the stressed venture world, with the stock down a lot.
However, dig just a little deeper, and you will find a much bigger set of problems at $SIVB… 1/10
The posts by Martin, the former manager of a now-closed hedge fund that peaked with about $1 billion in assets, went on to detail how SVB had ratcheted up its portfolio of securities by 700% near the “generational top in the bond market.”
When the bank experienced an increase in withdrawals from depositors this year, deep losses on sales of some securities created a hole in the balance sheet that triggered its spectacular failure in just two days this week, as a run on the bank erupted among its clientele of mostly young tech companies.
Martin said he initially started analyzing SVB out of suspicion that he’d find weakness in its book of loans to Silicon Valley startups. Instead, he realized how vulnerable the firm’s fixed-income investments had left it following a year of deep losses in the bond market.
“They had bought all these mortgages at the top of the market and were sitting on a massive unrealized loss,” he said in an interview. “And it was sitting there in plain sight. There were a number of other banks and insurance companies with similar issues, but I haven’t seen anyone anywhere near the scale of Silicon Valley Bank.”
Losses on the asset side of the bank’s balance sheet were more alarming in light of signs of trouble on the liabilities side: Its deposits were at risk of disappearing amid a cold snap in the once red-hot world of startups. Many of SVB’s customers were now burning cash rather than raising fresh funds thanks to the largess of the VC industry.
“When you layer on the fact that their primary depositors were venture- backed companies, so they were seeing outflows on deposits, it seemed from a short perspective, a pretty good setup,” Martin said.
Martin, who managed a Princeton, New Jersey, hedge fund called Raging Capital for 15 years before closing it and starting a family office, said he began shorting the stock in January. He said it was his largest short position for his family office Raging Capital Ventures, but he declined to say how much money he made on the trade: “It’s a nice win, but I prefer not to talk about specifics,” he said.
With the short position in place, he took to Twitter to make his case — including one post in which he described the bank’s “‘Hold to Maturity’ accounting trap,” referring to a bookkeeping maneuver that allows banks to avoid mark-to-market losses on bonds it doesn’t plan to sell.
$SIVB's HTM securities had mark-to-market losses as of Q3 of $15.9 b…compared to just $11.5 b of tangible common equity!!— Raging Capital Ventures (@RagingVentures) January 18, 2023
Luckily, regulators do not force $SIVB to mark HTM securities to market. But the bank would be functionally underwater if it were liquidated today. 5/10 pic.twitter.com/WoM5789o4X
The tweets have garnered a lot of attention now that a top 20 US bank with more than $200 billion in assets is under receivership with the Federal Deposit Insurance Corp.
Yet not everyone heeded Martin’s warnings in time.
“Two of my very good friends have meaningful dollars locked up there despite my advice,” he told Bloomberg. “So it’s a shame. I never thought it was going to play out this quickly and even to the extent that it did.”
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