It may go down in the history books of Silicon Valley: the time when the most prominent bank, one founded nearly 40 years earlier, injured itself so badly that it had to be bailed out by another even bigger bank or else it risked going up in flames in one day.
We don’t know yet who that “white knight” will be, but rest assured there are a lot of conversations going on right now about who will step in and take over Silicon Valley Bank, an institution whose shares are about 60% down from where they were at the beginning of yesterday. And why? Not because the bank is bursting at the seams. Instead, because it completely messed up some important messages at the worst possible time.
This, my friends, is what is called an own goal.
If you’re just catching up, here’s what happened: Silicon Valley Bank lost $1.8 billion in sales of U.S. Treasury bonds and mortgage-backed securities it had invested in, due to rising interest rates. The bank is also struggling with shrinking customer deposits, as its customer base of largely startups currently has much less money to park at a financial institution.
Being on this spot, it decided to raise a ton of money to secure its business. The plan was to sell $1.25 billion of common stock to investors, $500 million of convertible preferred stock and $500 million of common stock in a separate transaction to private equity firm General Atlantic. The apparent purpose was to project that the bank was conservative and was raising this money to stabilize itself.
Oh, how it backfired, and who can be surprised, given that it made its announcement just as crypto bank Silvergate announced it was winding down its operations.
You might imagine that someone at Silicon Valley Bank would have stopped to think, “Hmm, maybe today isn’t the right time to announce that we’re strengthening our balance sheet.” Apparently they didn’t. Instead at the end of the market that closed yesterday, they released a complicated press release that was so poorly received it was almost comical. Except that Silicon Valley Bank is a trusted financial partner to many startups and venture companies that are now nervously struggling to figure out what to do.
Also no laughing matter: Greg Becker, CEO of Silicon Valley Bank, who had to make a Zoom call late this morning to convince panicked customers it was just a small press release! It was not a comforting performance. “Keep calm, because that’s what’s important,” he said. Silicon Valley Bank has long been a supporter of you, the venture capital community companies, so panic is the last thing we need from you,” he added, saying what no one ever wants to hear from the head of their couch.
One of those customers, who declined to be named, told us afterwards: “It’s like the end of ‘Animal House’. Do not panic? Now I panic when I watch your broadcast.
What happens from here is the question. We’ve reached out to General Atlantic to see if it still plans to invest $500 million in Silicon Valley Bank common stock (we’ve yet to hear anything).
We reached out to Silicon Valley Bank itself, which repeated Becker’s previous talking points. Silicon Valley Bank was only trying/attempted to “strengthen its financial position”. It is “well capitalized”, has a “high quality, liquid balance sheet”, boasts “compliant capital ratios”, etc, etc.
Again, we’re betting a bank like Goldman Sachs shows up at the table and scores the deal of a lifetime (and keeps Silicon Valley Bank employees from running for the exits).
Meanwhile, those who work in investor relations may want to look for a new job.
Perhaps the same goes for Becker, who should have done more to diversify the bank’s business – this has been a problem that has been hiding in plain sight for years – but otherwise simply gave traders and hedge funds a fresh new way to trade in the current downturn. of the startup economy.
His only hope now is to convince the bank’s remaining customers that everything is fine and hope they will buy it. “We have enough liquidity to support our customers, with one exception,” he said earlier during that Zoom call. “If everyone starts saying to each other that SVB is in trouble, that will be a challenge.”