Fintech Horror Stories - The SVB Saga: the end, or just the end of the beginning?
Like something out of the Simpsons.
These days, it seems like we live in a movie - or an AI-generated simulation. Maybe it’s been that way since 2020. Every day seems like a black swan event. And for some reason, it seems like something always happens around Q1 of every year, since then, that has global reverberations.
Q1 2020 - COVID
Q1 2021 - January 6 insurrection/GameStop
Q1 2022 - Military conflict begins between Russia and Ukraine/NATO
Q1 2023 - Global banking collapses
Focusing on the last one, I’ve already spent quite a bit of time on the topic and perhaps there isn’t much more that can be said. But given the enormity of the event and as a sort of concluding statement/post-mortem, I thought for today it would be useful to recap everything (and I do mean everything) that has happened and then look ahead to what’s next and the open questions that remain unanswered. As a side note, major kudos to the Non-GAAP investing blog, which really honed in on the risk management issues that later on got picked up by larger publications and is the source for some of the below, especially in 2022. Let’s begin (links will be updated later):
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Throughout 2021 - SVB buys a bunch of 10-year mortgage bonds, after seeing its deposits grow 86% between 2020 and 2021.
December 4, 2021 - SVB Chief Risk Officer Laura Izurieta sells $4 million of shares.
April 2022 - Roger Dunbar steps down (or is removed) as SVB Risk Committee chair and is replaced by Kate Mitchell.
April 29, 2022 - Laura Izurieta steps down as CRO of SVB and moves into a non-exec role focusing on “transition related duties.“
Throughout 2022 - SVB’s Risk Committee meets 18 times. Until that year, the risk committee had only met between 4-7 times per year (dating back to 2016).
October 1, 2022 - Laura Izurieta leaves SVB. The company has yet to replace her on this date.
January 4, 2023 - SVB finally replaces Laura Izurieta, hiring Kim Olson. This concludes over 8 months with no risk officer for the company.
January 19, 2023 - SVB holds its earnings call for Q4 2022. On the call, Greg Becker talks about cash burn from its startup customers but says that it’s moderated as they expect a good deal of venture investment to continue. “We're prepared if those things don't improve, again, which is important. And even if the market challenges are prolonged or get worse, it's important to note we have a high quality, very liquid balance sheet, which I know there'll be lots of questions, about strong capital levels, a seasoned management team which we experienced navigating challenging markets, and adding a lot of new people with deep experience as well. And a consistent focus on our long-term business strategy.” He, Daniel Beck (CFO) and Marc Cadieux (Chief Credit Officer) get peppered with a number of questions around available for sale securities, one question around the now-infamous held-to-maturity securities, and a lot of questions on the cash burn issue. The answers must have been good enough for investors, as the stock skyrocketed almost 15% the next day.
February 21, 2023 - FT.com publishes a report honing in on the drop in value in the aforementioned held to maturity portfolio, specifically $15bn. Greg Becker responds with what seems like a reasonable defense of the decision despite some good grilling, and the investor (and more importantly, customer) impact on the stock and business is relatively muted.
February 24, 2023 - SVB releases its 2022 annual report which reveals further details on their investments.
February 27, 2023 - Greg Becker sells SVB shares of around $3.6 million.
March 1, 2023 - Silvergate files a report with the SEC stating its financials are worse than it disclosed on its recent Q4 earnings call.
March 6, 2023 - Someone buys SVB puts for $0.01, essentially betting that the stock will collapse. This is later referred to by the social media account @AlphaTrader00 as “the biggest % options pay off” they’ve ever seen as by March 9, this becomes a 642,900% gain. Did someone know what was about to happen and make a killing off of it?
March 8, 2023 - Silvergate officially collapses and announces its closing/returning deposits. On the same day, SVB decides to release its now-fateful “Strategic Actions” plan and holds a call with some of its key customers, saying that they are initiating a share sale on $2.25 bn to try and shore up losses as a result of the security while simultaneously finding a way to pin some of the blame on good old customer cash burn. Greg Becker pleads for his customers to “calm down.”
March 9, 2023 - Depositors begin to attempt to pull money out of SVB en masse. The stock collapses. Founder Fund and other venture capital firms pile on by urging their portfolio companies to pull out. Thanks to SVB’s poorly timed press release and call the day earlier, the same day that Silvergate announced its closure, people have connected the two and the run is on.
March 10, 2023 - The stock is poised to continue to tank as the share sale is called off and the banks shifts to attempt to find a buyer, before the FDIC steps in and shuts down the bank, securing deposits and basically allowing themselves the weekend to come up with a plan. They launch a bridge bank and appoint an interim CEO.
March 12, 2023 - The FDIC preemptively shuts down Signature bank, not waiting until the beginning of the business week to do so. For what it’s worth, Signature Bank was one of just a handful of banks that was both 1) newly exempted from Dodd-Frank stress testing as of 2018 thanks to a legislative rollback and 2) happened to have less than 10% of its customer accounts holding less than $250K in deposits. SVB was one of the only other banks.
March 13, 2023 - The FDIC brings relief to markets and depositors as it declares that all depositors will be made whole, and the same day access to accounts is restored with some reassuring words from the new CEO. On the same day, HSBC steps in to buy the assets of SVB’s UK subsidiary.
March 14, 2023 - Before anyone can breathe, Credit Suisse releases its delayed annual report, with the key feature being PWC (the external auditor) highlighting material weaknesses in the financial statements and issuing the rare adverse opinion.
March 15, 2023 - Saudi National Bank, Credit Suisse’s biggest shareholder, says it cannot buy more shares in the company, citing regulatory reasons. The stock tanks and panic ensues. In a personally memorable moment, Credit Suisse puts out a LinkedIn post trying to explain away the auditor opinion and yours truly calls them out for a poor attempt at spin, with my comment garnering likes from even current Credit Suisse employees.
March 16, 2023 - It seems like this is the day of the bailout. The Swiss central bank offers Credit Suisse a 54bn francs loan, which sends its stock soaring. Meanwhile, back in the US, struggling First Republic bank gets a 30B liquidity injection from peer banks that include the biggest names in the industry.
March 17, 2023 (Today) - First Republic suspends its dividend, the stock goes down 20%; SVB parent company declares bankruptcy; Dow down over 200 points.
Upcoming:
March 17, 2023 (Today) - Deadline for bids to buy SVB and Signature assets - is Elon going to put one in?
March 21, 2023 - Next meeting of the Fed - to find out whether they raise interest rates 50 bps, 25 bps, or not at all.
July 2023 - US will default on its debt obligations, unless Congress agrees to raise the debt ceiling. For consumers, this means even higher interest rates, a likely recession, loans becoming cost-prohibitive, and much more/worse.
Unknowns:
TBD - Mercury has been noted as the biggest winner of the SVB saga (and kudos to their CEO Immad Akhund who was an absolutely pivotal figure for the community during the pandemic with his legendary “Future of Fintech” Clubhouse sessions (along with VC Sheel Monot)). However, the real question is how long will the depositors that fled to them last? Is Mercury going to be a new home for the startup cash, or is it just a rest stop?
TBD - A rumor began that the FDIC would force any potential buyer of Signature Bank to divest of all crypto business before a potential purchase. Although the rumor was shot down by the FDIC itself, a petition was created and it created a bit of a mini-uproar in the crypto world. But even if not directly, then simply with SVB and Silvergate going under, has the crypto community effectively been debanked?
TBD - We talked about this yesterday, but with FedNow on the horizon, will this increase or decrease the likelihood of future bank runs with the promise of quicker withdrawals from banks?
TBD - The VC community may have found an interim solution with neobanks like Mercury, but SVB was different as it had decades of experience and was also investing in startups itself, providing debt equity. With struggles of the industry, what impact will this have on valuation? Could Stripe’s significantly reduced valuation (coming in at $50B) be a bellwether for more to come?
TBD - How will SVB management and the board of directors be held accountable for their decision making - not just in the weeks before the collapse, but in the years before?
A Final Note:
I’m going to be out of the country for an extended period of time - first to observe the Islamic holy month of Ramadan in the United Kingdom and performing volunteer work while I’m there - and then disconnecting for a few weeks afterwards. While under normal circumstances I would have simply paused the newsletter, I am utterly humbled by the level of interest and support you all have shown this publication over the last two months, so I feel it’s only right to continue delivering this to all of you, uninterrupted.
What will look a bit different is the content. While I tentatively expect to deliver one more exciting horror story for you all (and trust me, this is gonna be a good one!) next week, I’m excited to share that after that I’m going to be welcoming some guest writers to this space to share their perspectives under the “Fintech Horror Stories” theme. These are folks who have the same level of passion that I do, if not more, for the space and all things compliance/regulation/fraud/operations/etc. I hope you enjoy their content as much and maybe even more than my own, and I’ll look forward to rejoining the fray in mid-May.
Lastly, if I could impose, please check out Little Brothers - Friends of the Elderly, Chicago Chapter’s End Loneliness Symposium on April 4 - you can join in-person if you’re in the Chicago area (highly recommended) or virtually - I’m on the board and while I’ll be out of the country during the event, I’d really appreciate your support (and I know the elders we support through this amazing non-profit will as well).
Thank you!