HSBC/SVB: Franchise value is just as important to bank bailouts as assets

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The teeth of the $10 billion Silicon Valley Bank gift horse have received a thorough dental exam from acquirer First Citizens Bank. A result is a lawsuit against HSBC.

In March, First Citizens bought the failed tech lender at an auction organized by US banking regulators. It made the acquisition at a $10 billion after-tax discount to net worth. First Citizens’ market capitalization jumped from $7 billion to $19 billion.

But there’s a difference between the book value of assets and the nebulous but equally important value of a franchise. First Citizens is now suing HSBC, which acquired SVB’s UK business. The American lender accused the British bank of improperly planning the hiring of more than 40 American bankers. The maneuver was supposedly launched on Easter Sunday and was dubbed “Project Colonia”.

First Citizens wasn’t just buying valuations on a piece of paper when it bought SVB. It was also acquiring the employment contracts of the SVB bankers and with them the customer relations.

So-called restrictive covenants (non-compete and non-solicitation provisions) are increasingly controversial in the US. Critics, including those of US competition regulator Lina Khan, see them as restricting trade that harms entrepreneurship, labor markets, and economic well-being.

But for companies like First Citizens, the best employees are expensive investments packed with institutional knowledge and trade secrets. According to SVB’s lawsuit, HSBC was told that the banking group could generate a whopping $1 billion in annual profits within a few years. First Citizens must have counted on a windfall beyond £10bn.

The corollary is that the theoretical losses of the Federal Deposit Insurance Corporation exceeded that amount.

First Citizens asserted in court documents that privately-backed bank bailouts will not be attractive if key personnel are easily attracted.

The most important public policy question is whether there is a better way to bail out troubled banks. Forced sales can all too easily generate large apparent profits for a few bold buyers and recruiters.