Deregulation – The Beginning and End of Silicon Valley Bank (1983 to 2023)

Posted on | March 22, 2023 | 4 Comments

Mike Magee

To know Silicon Valley Bank – SVP (prior to its dramatic demise) is to understand the world of tech start-up’s – their needs, appetite for risk, human behaviors, and the rapidly changing and dramatic world of technologic breakthroughs.

The bank itself was four decades old created in 1983, in Silicon Valley, for Silicon Valley. Before its collapse a few weeks ago, it was the bank of choice for almost 50% of all life science oriented tech companies launched by venture capitalists in the US.

Life science and health start-up’s were a specialty of SVB, and cornered 12% of its $173 billion in deposits. But these are unusual and challenging customers. They are married to “reverse lending.” That is to say, a health tech entrepreneur might show up on your door step with a big dream in a field where only 1 in 10 succeed, and open an account with $25 million in venture capital dollars in hand, and ask you to be their bank of record. They then begin immediately to draw down the money to realize their dream, which, if successful in early stages, will require raising much more money.

The SVP bankers, venture capitalists, and start-up entrepreneurs lived together in this risky, high-flying ecosystem and were committed to mingling with each other. As one of their clients said, “If you’re trying to raise money and you want to go to a conference and meet 100 investors, not five investors, that’s the place to go.”

But the Harvard Business types say that this type of non-diversified hyper-specialization, with its super-fast digital banking infrastructure, is exactly what allowed SVB’s “loyal customers” to withdraw $42 billion in assets in a single day, leaving it $1 billion in arrears. As HBS professor Paul Gompers wrote, “the hyperconnected nature of SVB’s clients meant that a run on the bank could happen virtually instantaneously.”

Arguably, SVP bankers and their elite bench of health-tech analysts knew the start-up business in this discipline from start to finish. Their website featured a range of products and services, assessment tools and strategic visioning that, on their own, justified the customer fees. But in addition, the bank understood that these customers had special needs in cash management and wealth management, VC relationship building, and lucrative transitioning into IPO offerings if they got that far.

Yet, as 2022 arrived, there were clouds on the horizon. SVP laid it out, but with rosy bracketing. In their lead, they wrote: “Dramatic shifts over the past nine months indicate that a market rebalancing is underway, with investments and valuations lowering from 2021’s boom. However, the healthcare industry is more resilient during periods of downturn and remains ripe for innovation.”

Their three key takeaways were:

1) “Investments are down but rebalanced from 2021 with shifts to earlier stages.”

2) “IPO window shut, but M&A on the rise…After a record 19 IPOs in 2021, market conditions and poor returns brought healthtech IPOs to a halt in 2022.”

3) “Mental health valuations and deal sizes up despite broader downturn.”

Still as the new year approached, and inside the bank, warning signals had begun to flash, SVP analysts, seeing AI taking off everywhere, banner headlined that “Virtual and Hybrid Care Are Here To Stay.” As they saw it, “Now that virtual care is ubiquitous in 2022, investment is shifting to companies delivering quality outcomes. Mature alternative care companies must not only prove their profitability but also their ability to take on risk and accountability with buyers to deliver quality outcomes.”

Under the hood though, according to a Forbes report, issues dating back to Covid and 2019 had caught up with bank management. Forbes later reported that “From 2019 to the end of 2020, SVB’s assets, meaning loans, credit facilities, securities, and other investments grew 63%. And from 2020 to the end of 2021, total bank assets grew over 83%. This significant asset growth happened in years when Covid-19 caused death, illness, and lockdowns. Loans alone grew almost 114% from 2019 to 2020 and then almost 30% from 2020 to 2021…With a rise in assets comes more risk. What should have also caused eyebrows to raise was when risk weighted assets went up 13% at a time that asset size barely moved from 2021 to the end of 2022.”

What was missing here say experts wasn’t health sector chops but basic Banking 101: Gap Analysis – assessing a bank’s liabilities versus assets under various interest rate scenarios. Records now show that SVB losses in the fall of 2022 hit $100 million due to asset valuation decline. This triggered a bargain basement sale of $1 billion in securities on March 8, 2023, and the rest is history.

Not everyone was caught in the lurch. As Barron’s reported, SVP CEO Greg Becker unloaded 12,451 shares at $287.42 a share and pocketed $3.6 million. Adding insult to injury, the source of those shares were stock options exercised that day that were pegged at $105.18 a share. That was 2 weeks before the bank was shut down.

Adding to the irony, in a bipartisan move several years ago, Congress raised the monetary threshold for mandatory government stress testing in 2018 for medium size banks like SVP over the loud protests of Senate banking expert Elizabeth Warren. This type of predatory deregulation was (no doubt) applauded and all too familiar to many of SVP’s original health sector clients who remember as far back as 1980 (three years before SVP was launched) when Senators Bob Dole and Birch Bayh released government patents to NIH funded scientists triggering a new field – biotechnology. The full effect was captured 25 years later in a classic article in The Economist titled “Bayhing for blood or Doling out cash?”

But as Forbes analyst Mayra Rodriguez Valladares suggested, what goes around comes around. Her last word: “All those politicians and bank lobbyists who were successful at lowering liquidity stress requirements for banks under $250 billion assets must be very proud now. I sure hope that they go help all those depositors who cannot access their funds and those who will now be in the unemployment line, especially in California.”

Comments

4 Responses to “Deregulation – The Beginning and End of Silicon Valley Bank (1983 to 2023)”

Gerry Slater
March 22nd, 2023 @ 1:47 pm

Excellent review
Mike Magee
March 22nd, 2023 @ 2:30 pm

Thanks, Gerry! Great to hear your voice. Trust all is well with you and yours. Best, Mike
Lawrence Williams
March 24th, 2023 @ 4:52 am

Hey Mike.Thanks for the clarification of this mess. It is just so sad to see yet another instance of upper level managers manipulating other people’s money and when the ship hits the iceberg and heads for the bottom they cash out first, reap huge profits and then shout “ABANDON SHIP” and “EVERY MAN FOR HIMSELF”. It is absolutely immoral and should be criminal but those with the control of the money lubricate the political machine in a manner that keeps legislation setting limits on their greed fulfillment from ever being passed. Yet again our species at its worst. I truly believe that Homo Sapiens will eventually pass into history as a failed species.
Mike Magee
March 24th, 2023 @ 9:57 am

Thanks, Larry. Your voice, as usual, is prescient. Recently CNBC’s David Faber was pushing back on Sen. Elizabeth Warren’s “I told you so. We need to reassert regulations.” In a moment of frustration, she said, “I was a school teacher, and one thing I learned is that you couldn’t let the students grade their own tests.” I think that’s the core reality on the future of Home sapiens – their hard-wired behaviors can be self-destructive. Human societies formalize rules and regulations to limit the damage we might otherwise do to ourselves and others. Best, Mike