Shocking. My favorite bank, gone. And I am fearful that the successor won’t nearly be as good for our entrepreneurial community. As an entrepreneur and venture capitalist (VC), I counted on Silicon Valley Bank (SVB) to be there for my own and my portfolio startups. They did what other banks wouldn’t -not just take our deposits but provide working capital well before we had the resources to prove we had the assets to repay or the receivables to pass muster. They were part of the startup ecosystem. We as VCs, vouched for the companies we invested in, and even without guarantees, SVB trusted our judgement. SVB was rewarded with a loyal following assuring that once the companies were solvent and growing, deposits would increase, and all would be happy. We as entrepreneurs appreciated liquidity and financial flexibility with lines of credit and loans with favorable terms. But that’s not all. We became part of a network which helped us both in times of growth and trouble. I rarely saw complaints about this bank. They were there to help and support us. We represented future growth for SVB. It was a uniquely symbiotic relationship.
We don’t know everything about the internal workings of the bank, but this failure is well reported as a “run of the mill” run on the bank. It seems SVB was caught with rising interest rates that depressed the value of their bonds which, when forced to sell due to massive withdrawals, quickly wiped-out billions of dollars’ worth of assets. Whether they could have ridden out the crunch had there not been the panicked withdrawals is a matter of speculation. Suffice it to say that with these withdrawals, SVB didn’t stand a chance.
Where does the blame lie? Who is responsible and were their actions ethical? Some possibilities are the CEO, Moody’s, VCs, Regulators, the Fed, and the depositors.
Greg Becker, CEO: Greg, at the helm of SVB, is where the buck stops. He and his CFO Daniel Beck appeared to be slow off the mark in making sure their bond portfolio didn’t drop too far as interest rates rose and their bond prices declined. The fed’s interest rate hikes were expected and well publicized, so there isn’t an excuse for it taking SVB by surprise. The initiative to raise capital through stock sales for the purpose of shoring up their balance sheet should have started earlier. Does this sloppy business practice rise to the occasion of criminal negligence? Perhaps in the eyes of some. Giving them the benefit of the doubt, we might see that even if poorly managed, they had good intentions for the bank. So ethically they are OK if there was no malintent. However, what is questionable as we are learning now, is that both Becker and Beck sold stock just days before the collapse. It is likely that they were trading on inside information. If so, they are both ethically and legally wrong. They sold their stock to individuals and funds that trusted the value of SVB, thus purposely duping these buyers. It amounts to stealing, never an ethically justifiable act.
Moody’s: Maybe the first to sound an alarm was the rating company, Moody’s. Having notified Greg Becker of an impending downgrade, Becker had no choice but to try to prevent that from happening and get SVB’s finances in order. Moody’s, arguably, was the catalyst. Should they have downgraded the stock knowing it would hurt the company? Absolutely! That is their job. And as we know from the financial crisis of 2008, the rating companies were to blame for NOT downgrading mortgage-backed securities that were deeply in trouble. Now the hard question: Should they have simply warned SVB of the downgrade? By giving them time, the market was left in the dark, counting on a fair rating by Moody’s and others, believing the now questionable higher rating. Ethics and legality diverge here, since ethically it should have been made public immediately once the issue was known. Legally, there is no timeline, or even obligation, to do the right thing, as we saw in their defense in 2008 when the rating companies claimed it was “just their opinion.” They depend on their reputations and not the law to make their ratings trustworthy. Ethically, this is a tough one for sure. SVB might have suffered the same fate had Moody’s given only enough notice to ensure a correct assessment. Allowing SVB to time to convince them otherwise, Moody’s had to weigh the suffering of the public due to bad trades, with the suffering of the bank and their depositors due to bank failure. One could say that rating companies are there to protect securities buyers and consequently the public, in which case they did the ethically wrong thing. This is a systemic problem in the financial industry and one that should be reconsidered as a part of good business practice.
VCs: It’s hard to justify the actions by Peter Thiel and the VCs who called for their portfolio companies to withdraw all their money from SVB, without trying to work with the bank to save it. VCs are good at finance. That is their livelihood. What happened to their common sense knowing that any run on a bank will cause it to fail if it must liquidate assets that are under water? Basic financial understanding that banks keep only a small fraction of deposits in cash, makes it imperative that they depend on NOT having a run on the bank. The FDIC is supposed to allow depositors to trust there will be liquidity when they need it, alleviating a huge concern. Thiel and others know, or should have known, that once they initiated the run, even the best case for them would have been that the first few companies would succeed in withdrawing funds. The rest would be out of luck. The financial well-being of the bank and all the portfolio companies would be severely compromised. This does not consider, the well-being of employees, suppliers, families, corporate partners, and the industry itself.
Regulators: Regulators are the scape goat of any market failures. They are damned if they do, damned if they don’t. No industry clamors for more regulation and usually claims that self-regulation works better in a capitalistic society. This is hogwash. Repeatedly we see the failure of businesses to self-regulate. The prime example of this failure is the financial crisis of 2008. We know regulators are necessary and could have made a difference. With the annual bank stress tests, shouldn’t SVB have been flagged earlier? Are the tests sufficient and timely enough? This will be a discussion going forward to make sure we learn from this failure. The question of ethics for regulators is more of a question of what they are charged with doing and how well they execute their responsibilities. If they are doing both adequately and honestly, then this is a legal and societal question of how much freedom we want to give our companies, based on trustworthiness. When there are bad actors, harm is cause for everyone and regulators must keep plugging loopholes taken advantage of by those actors.
The Fed: Interest rates. The fed has the near impossible job of setting and influencing interest rates to balance growth and inflation. They also have responsibility for not introducing destabilizing market actions. In raising rates so rapidly over the past year, did the Fed properly consider the unintended consequences of that rise? The markets fared somewhat well with this rapid rise in that balance. Now we tamed inflation a bit and have not run the economy into a recession. We should recognize that this has not been without pain especially for the less well off. Bank failures, however, can destabilize the market as a whole, and SVB in particular can upset our entrepreneurial engine that promises future prosperity. Going forward, I am certain that this will be a topic when considering the next interest rate hike, if at least to look at every place where bonds lose value and asses the possible damage. Inverted yield curves complicate this to a great extent, as financial underpinnings assume the time value of money is a major factor in determining the long-term returns for parked money. Ethically, I believe the Fed, like the regulators, are on solid ground as they are trying to do their best, even if they didn’t predict a bank failure because of the quick increase in rates.
Depositors: Finally, can we blame the victims? Depositors to SVB were in a tough spot. VCs encourage their portfolio companies to use SVB because of the reasons I opened this opinion with. SVB rewarded depositors who kept all their money at SVB with preferential treatment when it came to loans and services. The risk in using only one bank became abundantly clear last week (before government intervention), only $250k was insured per account. With a failure, payroll, payables, receivables, and all financial parts of the company are in jeopardy. Prior to this event, few would have considered bank failure a possibility. In this startup community no one questioned the viability of SVB as it was the standard others were measured against. Should the CFOs of each depositor have been vigilant about checking on the health of its banks? They might be now. They are on notice that regulators may not protect them. In any case, few in the future will put all their financial eggs in one basket. In this situation, it is hard to see any ethical lapse by individual depositors, however, going forward, it is incumbent upon them to be better stewards of their financial assets.
I quote Alphabet’s motto: “Do the Right Thing.” Perhaps the right thing is not always obvious to all parties, but this is not an excuse to be irresponsible. We must learn from this event to ensure that this doesn’t happen again and apply these insights to broader situations. There is nothing like a crisis to make us all smarter.