Goldman Sachs tried to help SVB. It didn’t work. That’s what happened.

  • Goldman helped organize the stock offering ahead of the credit rating downgrade.
  • Imperfect communication about the proposal seemed to heighten concerns about SVB.
  • Centerview, a competitor to Goldman, now advises the bank.

With the news of the collapse of Silicon Valley Bank, the role of arguably the most powerful investment bank on the planet is being lost.

At the end of last week, its parent company SVB Financial Group turned to Goldman Sachs for help in a difficult situation.

By filling deposits when times were good for tech clients, SVB drained deposits as those same clients withdrew their accounts to pay wages and satisfy suppliers. Now the ratings agency has informed him that it may be forced to issue a potentially damaging downgrade.

Of course, Goldman Sachs could help. In corporate America, echoing the industrial logic of an earlier era, it’s often said that you can’t get fired for hiring Goldman Sachs.

Yet on Friday, the Silicon Valley bank crashed, becoming the second-biggest bank failure in US history. It was a rare blunder for Goldman Sachs, and there are questions about whether the investment bank gave bad advice.

So what happened?

Moody’s warns of rating changes

The drama began sometime last week when SVB received word from Moody’s Investors Service, a ratings agency, that it was preparing to downgrade its credit rating to reflect the difficult operating environment.

A significant downgrade could hurt SVB, which has been serving clients in the venture capital and startup ecosystem since 1983. Unlike industrial or retail companies, which can survive a downgrade, banks are vulnerable to such news as it could undermine confidence in their financial underpinnings. .

In response, the company approached longtime consultant Goldman Sachs to develop a capital raising plan to bolster SVB’s finances. If it could do so, it was believed that Moody’s could be persuaded to soften the severity of its downgrade.

This report is based on conversations with two people familiar with or informed of the chain of events, as well as current and former Wall Street bankers and a securities lawyer.

Ideally, companies and their investment banks like to arrange distressed deals in private meetings with investors in which they agree not to act on confidential information. In this way, bankers can protect their clients, find investors, and then announce the deal to the market. In industry parlance, investors are being thrown over the wall.

During the financial crisis, banks repeatedly strengthened their balance sheets using this approach.

But that would likely take longer than the company or its banker has, one source said. Moody’s was preparing to publish its decision within a few days. It usually takes investors 48 to 72 hours to evaluate a trade, if not more, especially when it will be used to close a hole in the balance sheet, as it was in this trade.

Goldman hit the ground running, and some of his bankers worked all weekend. But due to time constraints or a lack of interested buyers, SVB and Goldman were unable to reach a private deal.

This meant that they had to announce the deal and then find buyers on the open market, opening up the company to investors who could short sell the shares.

This is a common game in government securities markets. When a company sells shares, hedge funds sell the shares on the open market and then place an order to buy the shares in the offer, effectively covering their short positions.

This means that the company’s shares are vulnerable to short selling and are set for volatility.

By Wednesday, Goldman entered into a deal that sees SVB raise $2.25 billion in common and preferred shares, including a $500 million anchor investment from private equity firm General Atlantic.

The proposal receives a hostile response

SVB was ready to launch its proposal. After the close of trading, the bank issued a press release announcing the plan.

The language of the press release, however, was rife with financial jargon and seemed to be written more for investors than for startups and venture capital clients who keep their deposits in the bank.

Below in the press release, the company said it sold a portfolio of about $21 billion in bonds for a loss of $1.8 billion to restructure its balance sheet and make it more flexible for deposit withdrawals.

One of the people The Insider spoke to said it was an odd place for such a confession without the necessary context.

Some time later on the same day, the SVB released a presentation with more details about the proposal.

Around the same time, Moody’s downgraded the rating, stopping at one notch on the promise of a needed capital increase, but warning of continued weakness in SVB’s position.

“While the balance sheet restructuring is helping to reverse some of the negative trends in 2022, Moody’s does not think SVB’s financial profile is likely to return to its historically high levels over the next 12 to 18 months,” the rating agency wrote.

He also added more details about what he believes has diminished SVB’s ability to deal with deposit outflows. The bank had another portfolio with about $15 billion in unrealized losses, meaning SVB would not be able to use it to repay withdrawals.

Shares fell in the secondary market.

The next day, SVB shares continued to decline. “When it opened down 40%, it was all over,” said one person who was not involved in the trade. “Because then the vultures fly out.”

Shares ended the day down 60% to close at $106.04, and venture capitalists warned startup founders they should withdraw their money.

It fell even more after the market closed.

By then, Goldman had rounded up investors to buy the stock just below the closing price. But due to the rapid flight of deposits from the bank – a significant disruption to the company’s business – neither Goldman, nor the company, nor its lawyers were able to evaluate the deal.

By Friday afternoon, the Federal Deposit Insurance Corporation announced bankruptcy proceedings against the bank.

And it was provided to Centerview, a boutique merger consultant, not Goldman, to help the bank pick up the pieces.

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