SVB – What Could Have Been…If Only…

There are multiple theories about ways that the Fed’s rescue of SVB could have been avoided:

• VC Community could have rallied around SVB rather than ringing the warning bells. Just as the large banks have rallied around First Republic with their $30b in deposits – given the tight knit nature of the VC Community – it seems highly probable they could have pulled together to make the ~$2 billion capital raise a success.
• The capital raise could have been done privately and under NDA (See article on “Too Much Confidence in Your Confidentiality Agreement”). Rather than announcing the capital shortfall and then trying to raise public capital to fill it, perhaps parties who could have been interested in a private solution could have signed an NDA, and the shortfall plus the capital solution would have been announced at the same time.
• SVB could have hired a Chief Risk Officer to replace the one that left in April 2022. A reading of the annual report would indicate that very limited attention was paid to interest rate risk even though rates had been increasing for approx. 1 year.  The first-rate hike of this cycle was March 2022 and the Chief Risk Officer resigned in April?
• Regulators could have been firmer in their assessment of SVB’s risks. It seems the Fed raised concerns about SVB’s risk management back in 2019, and then reportedly again in 2021 when the SF Fed issued six warning/citations – it also seems there were no consequences behind the warnings.
• Fed could have bought the shares of SVB to lessen the moral hazard and potentially been made whole in its investment rather than just backstop insured and uninsured deposits.
• Fed could have made its open market window open to face value of collateral as it is doing post SVB/Signature bank collapses.

If any of these actions could have avoided SVB’s collapse and its contagion effect, then it really is a case of gross mismanagement on many levels.

If the problem is, as the market is indicating, bigger than SVB and Signature bank and is based upon  more fundamental asset repricing due to interest rate increases across a wide range of assets….

The banking crisis could help reduce interest rates, and voila – assets regain their value at lower interest rates – thereby ending the interest rate based banking crisis.

Please contact us at info@deerislegroup.com if you or someone you know would like to learn more about how we can help them with their capital sourcing.  We believe that the earlier, especially when capital markets are tough, an organization receives professional help defining their investment proposition, the better the results will be.

Capital Provider Interest – We have demand for stable, cash flowing credit and credit-like investments.  The yields for these investments has increased from ~12% a few weeks ago to 15%+.

Credit Suisse Credit – As Confused as the Rest of Us:  We are hearing that the Credit Suisse Bonds (Holdco, Bank and AT1’s have been trading at 40% swings within minutes over the weekend of 3/18/23.  For example, AT1’s had rallied over 60% and then crashed to no bid in a matter of minutes. As the weekend ended, it seemed clear that the At1s would not have much if any value.

Venture Capital – SVB Bonds worth 80%?:  We are hearing that distressed buyers believe that they could be worth as much as 80%.  They have been trading between 40 and 50%.

Venture Capital Companies – Extend Cash Available to 2 Years: We are hearing that VC’s are telling their portfolio companies to try to extend their cash availability and not to assume capital can be raised.

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