US authorities are probing the collapse of Silicon Valley Bank last week, just days after top executives dumped millions of dollars worth of stock.
The Department of Justice has opened an investigation into the sudden demise of the Californian lender after customers rushed to withdraw their deposits, according to multiple reports on Tuesday.
The Wall Street Journal, The New York Times and The Washington Post report the probe is still in its early stages, with the Journal also reporting the US Securities and Exchange Commission has launched an investigation.
SVB held deposits of $US290 billion ($433 billion) before it went under on Friday, marking the second-largest bank failure in US history after Lehman Brothers. On Sunday, New York-based Signature Bank was also shuttered by regulators.
‘Heavy heart’
As the sudden collapses sent shockwaves through financial markets and sparked contagion fears, the US government rushed to calm fears by guaranteeing SVB deposits.
President Joe Biden assured Americans the banking system was “safe”.
“I’m gonna ask Congress and the banking regulators to strengthen the rules for banks to make it less likely this kind of bank failure would happen again,” Mr Biden said from the White House on Monday.
On Friday, SVB chief executive Greg Becker sent a video message to employees describing the “incredibly difficult” 48 hours leading up to the Federal Deposit Insurance Corp (FDIC) being named receiver, after California banking regulators closed the lender on Friday.
“It’s with incredibly heavy heart that I’m here to deliver this message today,” he said.
“I want to acknowledge how hard the last 48 hours have been on all of you, and I care so much about all of you, it really is just so incredibly difficult. I’m trying to look past that and focus on two things — one, I’m focusing on you, I’m thinking about the ultimate outcome of what this could be despite this incredibly difficult time. And two, focusing on clients.”
Mr Becker said while he was “not making those decisions anymore”, he was working with the FDIC “trying to figure out how can we come up with the best outcome for our clients as well as our employees”.
“My goal at the end of the day is to figure out how to preserve a small portion of the franchise value that we’ve spent so much time building and hopefully find the right partner at the end of the day that the FDIC can work with to have this institution continue in some form,” he said.
“My unfair ask is this — can you guys just hand around, try to support each other, try to support our clients … which may be a slightly better outcome than where we are right now.”
As he delivered the message, Mr Becker wore a black zip-up jacket from Gleneagles, a luxury golf resort in Scotland. An annual membership at the famed club, regarded as the top golf resort in the UK, starts at £3500 ($6400) plus a £900 ($1600) joining fee.
“The Gleneagles jacket is over the top,” wrote law professor Stephen F. Diamond.
“The guy doesn’t even own merch from his company to wear?” another Twitter user asked.
A third wrote, “Maybe he should of been thinking about risk more and golfing less. But what do I know.”
‘Absolutely idiotic’
SVB’s decision to invest its hi-tech customers’ deposits in long-dated, low-yield bonds left it overexposed to interest-rate risk when the Federal Reserve began hiking its benchmark last year.
When the era of historically low interest-rates came to an end, hi-tech funding dried up, and SVB’s customers began withdrawing their money to pay their bills. This left the bank with no option but to realise its losses on those bonds — taking a $US1.8 billion ($2.7 billion) hit from the $US21 billion ($31.4 billion) fire sale — sparking a bank run among concerned depositors.
In a statement, SEC Chairman Gary Gensler said the agency was “particularly focused on monitoring for market stability and identifying and prosecuting any form of misconduct that might threaten investors, capital formation, or the markets more broadly”.
“We will investigate and bring enforcement actions if we find violations of the federal securities laws,” he added, without mentioning any companies by name.
As the blame game ramps up, one SVB employee speaking anonymously to CNN pointed the finger at Mr Becker, saying they were dumbfounded that the CEO publicly acknowledged the extent of the bank’s financial troubles before privately lining up the necessary financial support.
“That was absolutely idiotic,” said the employee. “They were being very transparent. It’s the exact opposite of what you’d normally see in a scandal. But their transparency and forthrightness did them in.”
Panicked customers rushed to yank their deposits on Thursday, leaving SVB with a negative cash balance of around $US958 million by the close of business.
“People are just shocked at how stupid the CEO is,” the insider told CNN. “You’re in business for 40 years and you are telling me you can’t raise $2 billion privately? Get on a jet and fly to Kuwait like everyone else and give them control of one-third of the bank.”
Share sale
News of the federal investigation came after Democratic Representative Ro Khanna called for Mr Becker to return money he made from a recent share sale.
The CEO, along with chief financial officer Daniel Beck, offloaded millions of dollars worth of shares just two weeks before the bank collapsed, records showed.
Mr Becker dumped nearly 12,500 shares worth more than $US3.5 million ($5.2 million) in a pre-planned, automated sell-off on February 27, according to an SEC filing. The same day, Mr Beck sold $US575,180 ($860,000) in stocks.
The pair sold off their massive stakes in a legal corporate trading plan established by the SEC to thwart insider trading, so it is not clear whether the CEO and CFO knew the company would collapse just two weeks later.
“We need all the facts,” Mr Khanna told CBS News on Sunday.
“I do think that money should be clawed back. Whether there was something nefarious or not … I don’t want people to jump to conclusions, but I do think all that money should be clawed back and given to the depositors, insured or otherwise.”
He also called for the FDIC to investigate short sales — bets on stock falling — by executives in recent months and said “at minimum, there should be a clawback with penalties of profits made”.
‘Fundamentally unjust’
The effective bailout of uninsured SVB depositors has sparked a furious war of words between high-profile tech entrepreneurs David Sacks and Vivek Ramaswamy.
Mr Ramaswamy, a 2024 presidential candidate, told SiriusXM host Megyn Kelly it was “fundamentally unjust”, saying the CFOs of some of the “multibillion-dollar companies” that had parked “eight- and nine-figure sums” at SVB “did not even know what the deposit insurance maximum was”.
“That’s part of a culture of excess in Silicon Valley created by among other things, 10, 15 years of easy money raining from on high from the Federal Reserve,” he said.
“One of the things that we’re doing here is rewarding bad behaviour, by saying even though you didn’t do your due diligence, even though you weren’t exercising basic financial discipline, we’re still going to reward that anyway. It’s a problem.”
But Mr Sacks insisted shareholders, bondholders and employees with stock options were being wiped out. “What we are doing here is protecting deposits, and if there is a shortfall, it’s not going to be paid for by taxpayers — it is being paid for out of insurance premiums by other banks,” he said.
“I think that is right, good, and appropriate. If you send a message across this country right now in the middle of a banking crisis that deposits are not safe, watch out, we are going to have those Jimmy Stewart runs on the bank. This is where I find Vivek’s position completely irresponsible.”
Australian fallout
Meanwhile, a number of Australian technology firms and start-ups have been caught up in the collapse of SVB, prompting the banking regulator to act.
Australian unicorn Canva was an SVB customer, although it said only a small amount of its cash sat with the bank. Several Australian venture capital firms have also confirmed that some of their start-ups had deposits with SVB and could be exposed at a small level.
ASX-listed machine intelligence firm Whispir, family tracking app Life360, software firm SiteMinder, EBR Systems, buy now pay later provider LayBuy Group, Straker Translations and Nightingale Intelligent Systems are among the affected deposit holders.
The Australian Prudential Regulation Authority said it was “closely monitoring the situation and potential impacts for the Australian financial system caused by the collapse of the Silicon Valley Bank”.
“While the Australian banking industry has limited connections with the US-based Silicon Valley Bank, APRA is intensifying supervision of the local banking industry and is seeking more information from them on any potential impacts,” a spokesman said on Tuesday.
“Australia’s financial system is strong, our banks are resilient, well capitalised and have strong liquidity coverage.”
— with AFP