Silicon Valley Bank Imploded. Here Were the Biggest Red Flags

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At this point, you likely don’t need another explainer or tick-tock about the run on Silicon Valley Bank, so let’s rewind beyond the tick or the tock.

Hindsight is 20/20, and, looking back, there were more red flags than you’d see on a Carolina beach in October. Here were the biggest, brightest ones that everyone seemed to miss.

Too Big to Fail 2: 2 Big, 2 Furious

For starters, it should now be generally understood that SVB operated less like a typical regional bank and more like the tech industry’s personal lending operation. Given that industry’s predilection for burning cash en route to, well, not exactly making cash, it isn’t surprising that the bank found itself overleveraged.

And it wasn’t a secret, either:

  • Red Flag No. 1: In its most recent earnings report in January, the bank revealed its held-to-maturity securities had mark-to-market losses of nearly $16 billion in Q3, against just $11.5 billion of tangible common equity. Essentially, the bank would be underwater if it was forced to liquidate all its assets.
  • Red Flag No. 2: The cause of the losses is simple — the bank took its tens of billions of customer deposits and invested heavily in bonds with sizable interest-rate risk. Worse, it was overloaded on long-duration bonds with more than 10 years to maturity, leading to a mismatch of assets and liability.
  • Red Flag No. 3: As of December, roughly 95% of deposits were above the Federal Deposit Insurance Corporation’s $250K insurance limit, according to SEC filings. Make no mistake, this was a high-stakes poker game.
  • Red Flag No. 4: Perhaps the risky maneuvering could have been avoided. But SVB operated without a Chief Risk Officer from April 2022 to January this year. That’s nine months… with no risk officer.
  • Red Flag No. 5: SVB did employ a Chief Administrative Officer, Joseph Gentile, who had been with the company since 2007. His previous employer? Lehman Brothers. Perhaps he just found himself in the wrong place at the wrong time. Twice… in a row.
  • Red Flag No. 6: CEO Greg Becker didn’t need a CRO. Just days before the bank disclosed the $1.8 billion loss that sparked the run, a trust owned by the big boss sold $3.6 million worth of SVB shares.
  • Red Flag No. 7: Peter Thiel, the influential tech venture capitalist/aspiring supervillain, withdrew his Founders Fund’s entire account worth millions from the bank by at least Thursday, Bloomberg reported, and encouraged its portfolio companies to do the same.
  • Red Flag No. 8: Where Thiel goes, well, so too do many tech leaders. The small, insular industry is practically by definition full of trend-chasers (these are many of the same folks who dropped everything to pursue Web 3.0, after all). In other words, it should’ve been a giant red flag that the bank’s entire clientele is hardwired to act in a way that perfectly facilitates bank runs.

Going Once, Going Twice: The FDIC began an auction process for SVB on Saturday, with final bids due Sunday afternoon. While that process is not yet complete, regulators took bold steps to stem the contagion effect of SVB’s collapse Sunday evening by guaranteeing the FDIC can protect all of the bank’s deposits, and announcing that Signature Bank has been closed by New York State regulators citing “a similar systemic risk exception.”