SIVBP - SVB Financial: Today Wasn't A Run On The Bank; It Was A Sprint

2023-03-09 23:59:41 ET

Summary

• 60% stock drop to far below book value makes any equity issuance incredibly punitive.
• If the company does not complete a equity offering, there is a hole in the balance sheet that puts the entire bank at risk.
• Large VC investors publicly called for their stable of companies to pull their deposits, adding a bank run to the company's woes.
• Long-dated bonds dropped over 10 points to junk-rated yields, reflecting jump to default risk.
• Today's debacle gives new definition to the saying, "Bankruptcy happens slowly and then all at once."

Update on SVB Financial's Status

Normally I don't write follow on updates a day after an article. However, today was no ordinary day and SVB Financial ( SIVB ) is no ordinary company. I worked in hedge funds during the dot-com bust and the global financial crisis. The latter of which I was a partner at a firm that had on the "big short". Given that work back then, I witnessed up close the failure of a number of very large financial institutions such as Bear Stearns, Lehman Brothers, Washington Mutual, Countrywide Financial, AIG, and Fannie Mae and Freddie Mac. I have to say that none of those companies officially imploded as quickly as SIVB blew up today. Today was epic and I don't really see a way out for the bank.

The article that I wrote last night and was published today (March 9th) "SVB Financial: Blew Up Even Faster Than I Expected" lays out the specific immediate causes of today's meltdown in the company's shares. I won't rehash the reasons here. Today's action deserves its own commentary.

The company's planned equity raise for today was in trouble early. Said simply, the company's stated reasons for needing to sell its available for sale securities portfolio and thereby incur a $1.8 billion loss didn't pass the sniff test. Even before the open this morning, the stock traded well below the end of Q4's book value per share of $200. It traded pretty much in a straight line down and by just after 10:30 a.m. had hit the $165 range. The ferocity of this stock sell off caused a vicious circle. The lower the stock traded, the more shares that would have to be issued to raise the $1.75 billion of common stock and $500 million of preferred. The more shares that had to be issued, the lower the shares traded. Ugly!

This dynamic led to a second vicious circle where the lower the likelihood of a successful equity offering made the bonds start to trade lower (yields higher) and also prompted a credit downgrade by S&P to BBB- negative outlook, the lowest investment grade rating. The lower the bonds traded, I believe the lower the stock traded and the whole system built on itself.

Compounding this problem, the stock and bond routs led several prominent VC's like Peter Thiel to call for their portfolio companies to pull their deposits from the bank. I have not heard any specific instances of that happening, but what responsible CFO or board of directors would allow their cash to stay on deposit at financial institution that had a gaping hole in its balance sheet and dwindling prospects of plugging it? Fears of some depositors pulling their money leading to increased stress and scaring other depositors to pull is an old fashioned bank run. A bank run is the ultimate vicious circle.

Dick Fuld Reprised: Pride Goes Before the Fall

I remember in the early summer of 2008 Dick Fuld, the CEO of Lehman Brothers, had a number of opportunities to raise capital to shore up his balance sheet. He turned down the offers because he didn't like the prices people were willing to pay for his stock. This grotesque failure to raise capital at a price he didn't like led to no capital being available at any price.

I don't know what discussions SIVB's management had with their underwriters Goldman Sachs ( GS ), but I'm pretty blown away they didn't print a deal even at a "price they didn't like". I believe failure to sell equity today will make the company vulnerable to more vicious depositor exodus and wider credit spreads. If tomorrow gets bad enough, this bank might not open for Monday morning. Given the costly legal nightmares the Obama admin (specifically AG Eric Holder) put BofA ( BAC ) and JP Morgan ( JPM ) for buying other banks during the financial crisis, I seriously doubt another bank will step in to rescue SIVB without full due diligence. That wouldn't be possible in three days.

Risks

Most risks I see are to the downside. I do not believe another bank will step in. If the company bites the bullet and issues equity at a terrible price, the market might rally at the prospect of the company being saved. That said any major equity issuance likely comes at a price that impairs shares for a long time. I imagine that Warren Buffett at Berks hire ( BRK.A ) (BRK.B) has been called. He saved BofA and GS in very dark times and has a long history of investing in banks when blood is in the streets. He could move fast enough. An investment by him would save the company from bankruptcy and he would likely make a ton of money, but I'm not sure the concessions he would demand would be great for current shareholders. I'm also not sure Buffett would be allowed to own more than 10% of a bank and $600 million wouldn't be enough to plug the $1.8 billion dollar hole the company had just after last night. Maybe something could be structured. Goldman is creative. We'll see.

Conclusion

The problems at the bank did not develop overnight. I first wrote about them in my December article "SVB Financial: Blow Up Risk" . Much like Silvergate ( SI ), this company took deposits that grew exponentially and bought assets that were too long duration. Apparently it didn't consider that deposits could fall and interest rates could rise leading to having to sell those assets at a loss, a classic ALM (asset-liability management) blunder. The speed and ferocity of this meltdown was unlike anything I've ever seen, but the root causes have been building for a while.

Today was rough for most other banks. I do not think we're anywhere near a banking crisis like we experienced in 2008. The banks are much better capitalized and generally better run. In my opinion, SIVB is somewhat unique in the dodginess of its deposit base and how poorly it managed its assets and liabilities, but I can't say there won't be more banks that get into trouble because of similar problems SIVB is facing.

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