Goldman Sachs: Should it be punished for its role in the Silicon Valley Bank debacle?
We journalists usually write articles about how problems like how the collapse of Silicon Valley Bank (SVB) happened. But because so much has been written about SVB since it became the second-biggest bank failure in U.S. history two weeks ago, I’d like to depart from form.
Instead of chewing over the SVB’s collapse, I’d like to make some suggestions that I think could help forestall future SVB-like problems by instilling in Wall Street the fear of making unseemly profits on the financial distress of others.
As part of this, I’d like to suggest a non-traditional and constructive approach for our political leaders to take during public hearings next week examining the role that Goldman Sachs (GS) played in the collapse of SVB. There’s no date set for those hearings, but you can be sure that we’ll have them.
Rather than use the upcoming U.S. Senate Banking Committee hearings to posture and make speeches, which are Congressional specialties, it would be great if the people running the show use them to extract the information from Goldman that will allow us to figure out how much money Goldman made by buying $24 billion of securities from SVB at a below-market price.
And then to demand that Goldman turn over that profit to the federal government as compensation for the financial damage caused by SVB’s collapse and the subsequent aftereffects.
You can be sure that if that happened, Wall Street firms would hesitate before taking massive advantage of Main Street firms that are in financial distress and in need of financing and good advice, as SVB was.
Here’s the deal, based on my reading of documents, conversations with knowledgeable people who declined to talk on the record and more than 50 years of parsing numbers and explaining them in what I call “a language approaching English.”
SVB, which had foolishly loaded its balance sheet with long-term federal government securities yielding less than 2% back when interest rates were mega-low, needed to convert those securities to cash to try to avoid a credit downgrade from Moody’s and to raise cash to pay off depositors who were starting to take their money out of the bank.
On March 8, SVB ended up getting about $21.5 billion from Goldman for securities that were valued at about $24 billion on its books. The bank took a $2.5 billion loss on the sale. But it painted the most optimistic picture of the deal, stressing that its loss was $1.8 billion after taxes, a number that you see a lot, rather than $2.5 billion, a number that you rarely if ever see.
The securities were selling for less than SVB paid for them because their average yield was fixed at a pathetic 1.79% and the yield on 10-year Treasury securities was about 3.8%. This meant that SVB’s 1.79% securities were valued in the financial markets at less than face value.
However, because of bookkeeping rules, SVB was carrying its portfolio of so-called “available for sale” securities at cost, not at their market value. That’s why the $1.8 billion loss that SVB announced on the sale of the securities to Goldman came as a shock to SVB depositors and was a key element in starting a massive deposit outflow that caused the FDIC to take over the bank.
That takeover, combined with the failure of Silvergate Bank and Signature Bank, both of which specialized in what I call “craptocurrency” (and most people call cryptocurrency), threatened to turn into a total financial panic. That prompted the federal government to say that all deposits in three banks were fully guaranteed, not just those up to the $250,000 limit.
Goldman profited in two ways from its purchase of SVB’s securities.
First, because it was one of the few buyers capable of cutting a check of $21.5 billion in an overnight transaction, it got to buy the $24 billion of securities for less than their market price because it was dealing with a desperate seller that was in a big hurry.
It’s not clear how big that discount was. The number that emanates from Goldman is 0.26%—which works out to something in the $50 million to $60 million range. If the right questions get asked by lawmakers, we’ll be able to get the right number.
Now, for the second source of profit. With interest rates falling as the result of the turmoil in financial markets, the market prices of the securities Goldman bought from SVB rose. Goldman’s intention was to sell most (if not all) of the SVB securities as quickly as possible, but we don’t know how many of those securities it sold or at what prices. Again, if the right questions are asked, we can find out Goldman’s profit on that part of the deal, too.
Then there’s a whole other, complicated question of whether it was SVB’s managers or Goldman that screwed up the timing and that precipitated the announcement of the $1.8 billion loss before Goldman had lined up buyers for $2.25 billion of new SVB stock. That announcement touched off the bank run that led the FDIC and the state of California to close SVB.
We need to know if SVB came to Goldman saying that it wanted to sell it the “assets for sale” and to also raise new capital to offset its losses, or whether Goldman suggested the securities sale and capital raising as a package deal.
Why does this matter? Because if SVB had raised the $2.25 billion of capital that it was seeking before it did the asset sale and announced its $1.8 billion after-tax loss, depositors would have had nothing to be frightened about and we’d probably be talking about SVB in the current tense, not the past tense.
But announcing the loss, combined with SVB CEO Greg Becker announcing that the bank was seeking to sell $2.25 billion of new stock and urging the bank’s depositors not to worry, made it impossible to raise the capital and doomed the bank.
If the timing of the asset sale and the failed capital sale is SVB's fault, then we can’t blame Goldman for SVB’s collapse. However, if SVB came to Goldman for advice and Goldman advised it to sell assets and raise capital, then doing the asset sale and disclosing the loss before raising the capital is the fault of bad advice from Goldman.
It would be great if lawmakers use the upcoming hearings to find out how much the government should seek to claw back from Goldman on the money it made on the assets it purchased from SVB. It would be even greater if in addition to that, we could find out whether to blame Goldman or SVB’s managers about the terrible timing of SVB announcing a big loss on the asset sale to Goldman before lining up investors to buy the $2.25 billion of new SVB stock the bank wanted to sell.
Will either of these things happen? It seems unlikely—but we can always hope.
Allan Sloan, who has written about business for more than 50 years, is a seven-time winner of the Gerald Loeb Award, business journalism’s highest honor. He’s won Loebs in four different categories over four different decades.
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