How Silicon Valley Bank's rescue plan backfired
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On Thursday morning, Silicon Valley Bank (SVB) had a plan to shore up its balance sheet. Clearly, the plan didn't work.
When SVB announced a plan to raise $2.25 billion of fresh capital on Thursday, it should have put worries about its solvency to rest. Instead, it precipitated a run on the bank, which has now been nationalized and is being run (at least until Monday, and possibly for much longer than that) by the FDIC.
The big picture: The now-defunct capital-raising plan involved issuing two different classes of stock, with pricing meant to take place after the close of trading on Thursday.
- The dilution of existing shareholders was therefore unknown. SVB planned to issue $1.75 billion of new common stock, for instance — which would be 8.75 million new shares at $200 each, or 17.5 million new shares at $100 each, or 44.5 million shares at $39.27, which is the last pre-market price at which the stock traded before it was suspended on Friday morning.
- The lower the share price, the greater the dilution. So when the stock started falling, the deal looked increasingly bad for SVB, putting extra pressure on the stock.
- Eventually, a distinction started being drawn between SVB Financial Group, the bank holding company that also has substantial outstanding liabilities, and Silicon Valley Bank itself. Even if the latter retains real value, the holdco could easily be insolvent.
Between the lines: It wasn't just stock-market investors who were fixated on the SVB share price. Depositors were too, especially given that Silvergate had announced that it was liquidating just one day earlier.
- Because SVB was now in the middle of a securities offering, it considered itself to be in a "quiet period" where it couldn't communicate anything substantive to depositors, investors, or the press beyond what was in its SEC filings.
- So the only real up-to-date information that depositors had about the health and viability of the bank was the plunging share price — and the ever-growing number of stories of other depositors pulling their deposits.
Be smart: Only a small handful of U.S. bank depositors have lost money in a bank failure in living memory, even when they had much more than the FDIC maximum on deposit.
- Still, the cost of moving money to a different bank, even if only temporarily, was tiny — so a lot of people did it. That's a bank run, and a bank run is an existential crisis for any bank.
- SVB CEO Greg Becker then did his bank no favors when he told customers to "stay calm" on a call, while also conceding that they were "starting to panic." Such talk has broadly the same effect on the market as it does on your spouse.
The bottom line: Between dilution worries and bank run worries, the share price just couldn't find a level at which there was any real buying interest — let alone enough buying interest to support a $2.25 billion share sale. So it just kept going down, deposits kept on flowing out, and eventually, on Friday, Silicon Valley Bank became the largest U.S. bank failure since the global financial crisis.
Editor's note: This story has been corrected to say that only a small handful of U.S. bank depositors have lost money in a bank failure.
