Monday May 27, 2024

Here is how Silicon Valley Bank shot itself in the foot

Due to increased interest rates, Silicon Valley Bank lost $1.8 billion when selling its investments in mortgage-backed securities and US bonds

By Web Desk
March 10, 2023
Silicon Valley Bank CEO Greg Becker.— AFP/file
Silicon Valley Bank CEO Greg Becker.— AFP/file 

The incident involving Silicon Valley Bank, a bank created over four decades ago, is possibly going to be recorded as that time in history when it had to be rescued by another bank, otherwise, it could blow up into flames in a single day.

We don't yet know who the "white knight" will be, but you can bet there are plenty of discussions going on right now about who will step in and buy Silicon Valley's most popular bank, an organisation whose shares are down by more than 80% from where they were at the start of yesterday in after-hours trading.

Then how and why? Well, not because the bank is disintegrating from the inside. Instead, it badly mishandled some crucial messaging at the worst possible time.

What happened to Silicon Valley Bank?

Here is what happened: Due to increased interest rates, Silicon Valley Bank lost $1.8 billion when selling its investments in mortgage-backed securities and US bonds.

Given that its clientele, which consists primarily of startups, has far less money available to park at a financial institution at the moment, the bank is likewise dealing with declining customer deposits.

It made the decision to raise a lot of money to protect its business because of its current situation. It was intended to sell $500 million in convertible preferred shares, $1.25 billion in ordinary stock to investors, and another $500 million in common stock to the private equity firm General Atlantic in a separate deal, Tech Crunch reported. The obvious intention was to give the impression that the bank was being cautious and gathering the funds to help stabilise itself.

It flopped, though, and who can be shocked considering that it announced these plans just as the cryptocurrency bank Silvergate announced it was ceasing operations.

Someone at Silicon Valley Bank might have stopped to consider that this might not be the best time to shore up the balance sheet. 

It is clear that they didn't. Instead, they issued a confusing press release yesterday after the market closed, which was treated so poorly it was almost funny. Except that many entrepreneurs and venture firms are currently frantically trying to figure out what to do to rely on Silicon Valley Bank as a financial partner.

It is definitely not funny to the estimated 6,500 workers of Silicon Valley Bank either or to its CEO Greg Becker, who had to hop on a Zoom call late this morning to reassure terrified clients that it was simply a quick news release.

"My ask is just to stay calm because that’s what’s important,” Tech Crunch quoted Becker as saying in a not-so-assuring ask to many people viewing him, not given the opportunity to ask him anything.

The CEO said that the bank had been a "longtime supporter" of the viewers and of venture capital community companies.

An anonymous customer told the tech outlet that it was impossible to not panic.