Craig Coben is a former global head of equity capital markets at Bank of America and now the managing director of Seda Experts, an appraisal firm specializing in financial services.
Just over two months ago Silicon Valley Bank embarked on a plan to save itself from a potentially fatal rating downgrade.
The rescue plan involved two sequential steps. First, SVB would sell its loss-making bond portfolio to Goldman Sachs. Second, SVB would offset its losses by launching a Goldman-managed stock offering.
Unfortunately the second stage failed, catastrophicallytriggering a bank run by depositors and the eventual collapse of the bank.
In prepared remarks In the Senate Banking Committee on Monday, former CEO Greg Becker clarified that he was following outside advice (emphasis ours):
On 8 March, the SVB announced the sale of the available-for-sale (“AFS”) portion of its securities portfolio with the intention of reinvesting at higher interest rates and raising additional capital. Based on recommendations from Goldman Sachswe decided to sell our AFS portfolio earlier to realize these losses and explain to the market why we were raising capital, given that SVB’s financials were otherwise healthy… SVB’s executive team, the board of directors and our external advisers intended that these actions strengthen the capital position of SVB … The consensus was that these actions were in the best interests of SVB.
According to Becker’s account, Goldman had proposed a holistic solution: first sell the bonds to Goldman, then sell the shares to the market. Goldman reportedly averaged unexpected commercial gain on the bond deal, but the stock offering (which was not guaranteed or subscribed) foundered when depositors panicked, precipitating a vicious cycle of loss of confidence that ended in the bank’s demise.
Becker’s testimony, however, seems to contradict what Goldman wrote in 10 Q filed May 4 (italics ours):
The firm is also cooperating with and providing information to various government agencies in connection with their investigations and investigations of SVBFG and its affiliates (collectively “SVB”), including the firm’s activities with SVB in or around March 2023, when SVB engaged the firm to assist with a proposed capital increase and SVB sold the firm a portfolio of securities.
This formulation (which – confusingly – reverses the chronological sequence of events) seems to suggest that Goldman has not proposed a holistic solution. In this tell, Goldman traders and investment bankers worked with/for SVB at the same time, but there was a Chinese wall between them. Presumably one side of the company didn’t know what the other was doing, even though Goldman’s senior management probably did. For the sale of the bonds, SVB acted as market counterparty to Goldman; for the stock offering, he was Goldman’s client.
The difference between the two narratives is important. Goldman has a duty of care to a client, but not to a counterparty.
Noting that several US Senators were calling for an investigation into Goldman’s role, I wrote about FTAV last March:
If Goldman had an actual advisory relationship (either in the form of a signed warrant or an informal understanding), the stakes are considerably increased with regards to its responsibilities, because the outcome – buying bonds for bonds, better efforts for shares – it served only interests more than those of SVB. Any investigation will presumably look into the advice Goldman has given about the bailout package. And the fact remains that Goldman reportedly made a lot of money from a package that failed to save SVB.
Becker says that, on Goldman’s advice, he sold the bonds first as part of a global bailout. Goldman will likely argue that it bought the bonds on arm’s length and – in a wholly independent venture – did its best to place the equity.
There is a lot to be had about which version of events prevails.
—————————————————-
Source link