Inside the collapse of Silicon Valley Bank

Gregory Becker, CEO of Silicon Valley Bank, leaned back in his chair at a technology conference last week in San Francisco’s luxurious Palace Hotel, and delivered a bullish message.

In the confident, almost bombastic, style that was his signature, Becker told the audience of investors, Wall Street analysts and technology executives that Tuesday afternoon that the future of the tech industry was sparkling — and so was Silicon Valley Bank’s place within it.

What he didn’t say was that, roughly a week earlier, rating agency Moody’s had called to tell Becker that his bank’s financial health was in jeopardy, and its bonds were in danger of being downgraded to junk. Realizing the bank needed to raise cash, Becker had been scrambling since then to fix things.

That phone call set off a frantic scramble inside Silicon Valley Bank. Just one day after Becker projected confidence at the conference, the bank announced a $1.8 billion loss and a hastily put together plan to raise $2.25 billion in fresh capital. The news spooked the bank’s depositors and investors so much that on Thursday, its stock plummeted roughly 60% and clients pulled out roughly $40 billion of their money.

By Friday, Silicon Valley Bank was dead.

The bank’s failure sent the stocks of more than a dozen small and midsize banks reeling on Monday, but they rebounded on Tuesday. But the rebound remains small compared to the scale of the losses inflicted in recent days.

The Federal Deposit Insurance Corp., which took over the bank, has since been trying to auction off all or parts of it. On Sunday night, the federal government said all customers would be made whole.

The tale of Silicon Valley Bank is one of ambition and management mistakes, of a CEO who talked so much about innovation and the future that he and his lieutenants didn’t pay enough attention to the mundane but enormously important work of managing risk and ensuring financial prudence. When the bank was caught flat-footed in a rapidly changing economic environment, it waited till the last minute to try to avert its fate.

“This isn’t greed, necessarily, at the bank level,” said Danny Moses, an investor at Moses Ventures known for his role in predicting the 2008 financial crisis in the book and movie “The Big Short.”

“It’s just bad risk management,” Moses added. “It was complete and utter bad risk management on the part of SVB.”

Becker could not be reached for comment. Former representatives of Silicon Valley Bank directed queries to the FDIC, which declined to comment.

Silicon Valley Bank began in 1983 as a small community bank catering to fledgling tech companies. Throughout the 1980s and 1990s, its fortunes and size grew along with the tech sector.

After an ill-fated foray into real estate lending in the early 1990s, the bank returned to its roots, pitching its services to fast-growing but typically unprofitable companies during the internet boom. The bank also made a side bet on California wineries.

Becker, who grew up on a farm in Indiana, joined the firm in 1993 shortly after graduating from Indiana University. He worked one year at another California bank in the early 1990s but otherwise spent his career at Silicon Valley Bank.

By 2011, when Becker was named CEO, the bank had expanded to dozens of cities in America and worldwide. He saw an opportunity to woo startups and venture capitalists with new offerings.

“When Greg took over as CEO, he had a definitive vision for what he wanted Silicon Valley Bank to be,” said Timothy Coffey, a bank analyst at Janney Montgomery Scott. “He wanted to be the heart and soul of what we ended up calling the innovation economy.”

In that, Coffey said, he succeeded: “Nothing happened inside the Valley that didn’t involve Silicon Valley Bank.”

A firm’s founders could keep its cash at the bank or get a line of credit, invest their personal wealth, borrow against their private stock and even take out a mortgage for their first home there. Silicon Valley often worked with startups that later became tech giants, engendering loyalty from many founders and venture capital investors.

SVB’s bankers were omnipresent at tech happy hours and conferences, and they often hosted networking events and dinners where clients could schmooze. They learned about the various tech businesses, from artificial intelligence to climate, and even helped founders with recruiting.

Based in Santa Clara, California, the bank had at least five offices in the Valley area, with an aesthetic that one person described as “part stainless-steel tech vibe, part VC resort vibe.” Wine fridges dotted the offices. Visitors to the office on Sand Hill Road in Menlo Park, the heart of the Silicon Valley ecosystem, often remarked on the display of wines from the vineyards the bank had financed.

From his earliest days as CEO, Becker kept a tight grip on the firm, said Adam Dean, a former president of SVB Asset Management who left more than a decade ago. “It was the church of Greg.”

Becker positioned himself as a champion of innovation. In official bios, he described himself “an advocate for entrepreneurs, their investors and corporates in the innovation sector internationally.” He cultivated friendships with venture capitalists.

“Greg was always looking out five to 10 years,” said Coffey. “He was more of a VC than he was a banker.”

For thousands of founders and their venture capital backers, SVB became the bank of choice. That was reflected in its swelling deposits: By the end of 2021, the bank held $189.2 billion in deposits up from $102 billion in 2020 and $49 billion in 2018. Its stock price roughly tripled from 2018 to 2021.

Flush with cash to invest, Becker began to build an investment banking business to advise companies on mergers and initial public offerings, deals that bring in big fees. The bank offered large pay packages to bankers from bigger rivals. It bought a Boston bank for $900 million to manage money for wealthy clients on the East Coast.

Despite its growth in deposits, the bank struggled to find ways to make money off them. Banks typically invest customer deposits in a variety of assets that they can earn a return on, including a mix of long-term and short-term bonds issued by the government — a largely safe bet.

But SVB decided that government debt that came due over 10 to 30 years — and offered higher interest rates at the time — was a better bet than shorter-duration bonds, which paid less interest, according to analysts. So it made an outsize bet on long-dated bonds, a lack of diversity that increased its risk.

As of Dec. 31, SVB classified most of its debt portfolio, or roughly $95 billion, as “held to maturity.” Because of a quirk in banking regulation, the bank didn’t have to account for fluctuations in the value of those bonds on its balance sheet.

On average, banks with at least $1 billion in assets classified only 6% of their debt in this category at the end 2022. But Silicon Valley Bank put 75% of its debt as held to maturity, according to a research report by Janney Montgomery Scott.

By classifying most of its debt this way, SVB was able to mask its brewing troubles longer than it otherwise would have been. But as interest rates rose, investors recalculated where to put their money. Venture capital investing slowed down. Startups began to withdraw more money from their accounts.

The bank’s conundrum: If it continued to give clients their money, SVB would be stretched for cash. But if it sold those long-term bonds, it would have to do so at a loss. Because newer bonds were paying more interest, buyers would purchase long-term debt at a discount from their value when SVB bought them.

The problems weren’t immediately visible to analysts because losses on debt portfolios are considered paper losses — until they’re actually sold at a loss.

It didn’t help that the bank’s chief risk officer, Laura Izurieta, began discussing her retirement in early 2022. She officially left in April but stayed on to focus on “certain transition-related duties” until Oct. 1, according to a filing. On Dec. 27, the bank appointed Kim Olson as its new chief risk officer.

Even as risk management appeared to take a back seat, Becker continued to express his excitement over the innovation economy. “The market is still so robust,” he told analysts on a conference call early last year. “There’s so much potential. There’s so much dry powder that we remain still very optimistic.” He dismissed concerns of a downturn.

By summer, the mood of the economy had soured. Companies were halting plans to go public or conserving their cash. As Silicon Valley Bank welcomed its 2022 class of interns in New York, a planned multimillion-dollar renovation of its midtown Manhattan office was on pause, a former employee said. The air conditioning was faulty. Paint was chipping. And mice were running across the floors.

In late February, Becker, sat onstage in the dark theater of the Academy Museum of Motion Pictures in Los Angeles, where SVB was co-sponsoring a conference. Asked by a reporter about the bank’s tanking bond portfolio, Becker said it had “zero intention” of selling its underwater securities.

That plan would soon change.

Shortly after Moody’s warned Becker of a potentially steep downgrade early in the week of Feb. 27, the bank reached out to Goldman Sachs, frantic that there could be a run on the bank if it didn’t shore up its finances, a person with knowledge of the deal said. It needed to sell some of its debt and raise new money from stock market investors.

Days after the Moody’s call, the bank said in a March 3 filing that it would be able to “sustain overall healthy client fund levels, despite balance sheet pressures from declining deposits, elevated client cash burn and overall market environment challenges.”

Last Wednesday, the bank issued a news release after the market closed, saying it had sold $21 billion of its debt at a loss of $1.8 billion and was looking to raise $2.25 billion in new equity. The investment firm General Atlantic said it would buy $500 million of the bank’s stock.

That afternoon, and on Thursday, Goldman bankers started pitching investors on buying SVB shares. The announcement had spooked investors, who worried that the bank was in deeper trouble than it was letting on. When the markets opened on Thursday, the bank’s shares fell steeply.

Silicon Valley woke up to a blizzard of text messages, phone calls and Twitter posts about the bank’s mounting woes. Clients of the bank rushed to pull deposits. On Thursday alone, they withdrew $42 billion.

Late morning Pacific time, Becker got on a webinar with hundreds of investors and lawyers. The bank had plenty of liquidity, he said, but he ended the call with one caveat: If people began telling one another that SVB was in trouble, it would pose a challenge, according to people briefed on the call.

When David Selinger, CEO of the security firm Deep Sentinel, who had been a Silicon Valley Bank customer for two decades, saw that line in a transcript that his lawyer had sent him, he instantly told members of his board that they needed to pull all their money from the bank.

“It’s like in those words he created a prisoner’s dilemma for us,” Selinger said. “As much love and desire we have for SVB, fear came first.”

But by Thursday afternoon, banking regulators including the FDIC were warning SVB that the bank might not survive, two people briefed on the negotiations said. The bank’s financial advisers raced to find a potential buyer, but none came forward.

On Friday morning, trading in its stock was halted. By that afternoon, the regulator had seized the bank. Becker’s nearly 30-year tenure at Silicon Valley Bank was over.