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72 Hours In Washington: How The Frenzied SVB Rescue Took Shape

Haunted by the fallout from the 2008 financial crisis, President Biden told aides that no taxpayer money should be used.
72 Hours in Washington: How the Frenzied SVB Rescue Took Shape
72 Hours in Washington: How the Frenzied SVB Rescue Took Shape
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It was approaching midnight in Washington and 9 p.m. in Santa Clara, California. The news was bad—and getting worse. Everyone from President Joe Biden on down was getting a crash course on Silicon Valley Bank, the once-obscure tech lender that has now cast a big shadow over the financial markets.

At the White House and the US Department of the Treasury next door, bleary-eyed officials were racing to prevent the trouble at SVB from exploding into a full-blown banking crisis. A block west at the Federal Deposit Insurance Corp., regulators were arguing about what to do. Over at the Gridiron Club dinner, Washington’s annual see-and-be-seen white-tie journalism roast, a marquee guest, Federal Reserve Chair Jerome Powell, was conspicuously absent.

Read more: SVB’s Failure Exposes Lurking Systemic Risk of Tech’s Money Machine

That Saturday, March 11, the fate of techdom’s preeminent bank—and with it, some feared, the future of the global economy—was being gamed out in Washington. Over the next 24 hours, almost everyone in the financial industry would be on tenterhooks as federal officials raced to complete a rescue before Asian markets opened Sunday night.

Almost a week later, the implications of the SVB fiasco, the second-biggest bank failure in US history, are still coming into focus. Questions keep piling up. How could SVB, a favorite of venture capitalists and unicorn startups, succumb to a run in the smartphone age? Why hadn’t banking regulators seen this coming?

Federal authorities want answers, too. The Department of Justice and the Securities and Exchange Commission have opened investigations into the collapse. One potential focus: sales of SVB stock in the weeks before the failure by Greg Becker, chief executive officer of the bank’s parent company. Biden, meanwhile, has pledged a push to tighten banking rules, which the Fed is already considering doing for midsize institutions like SVB.

This much is sure: All these years later, Washington is still haunted by the Wall Street fiascoes that triggered the Great Recession. The colossal bank bailouts of that era saved the economy, but they also rankled ordinary Americans, gave birth to the Tea Party movement on the right and Occupy Wall Street on the left, and transformed US politics. Backlash to the bailouts died down, but the resentment never really went away. It may have ultimately helped Donald Trump win the White House in 2016, some political scientists have said.

Which is probably why President Biden has been reluctant to even say the word “bailout.” He vowed on March 13 that “no losses will be borne by the taxpayers.” For the time being, Biden is right. This doesn’t look like a Lehman moment that could upend the whole economy. But it look like a Bear Stearns one—a smaller debacle pointing to more pain to come, in this case, because of the sharp rise in interest rates that triggered SVB’s problems and are still roiling the financial system.

Read more: Credit Suisse Ignites Global Market Rout as Banking Fears Return

Federal authorities have taken the extraordinary step of guaranteeing all deposits at SVB and opening a broader emergency lending program. By midweek, the fix was holding. If it doesn’t, the next move might have to be a suspension of the $250,000 limit on federal deposit insurance.

Policymakers, venture capitalists, banking executives and tech entrepreneurs are all struggling to figure out the next steps. SVB’s failure has changed the conversation about banking and the regulators who oversee it. Suddenly, everyone is thinking about other risks that might be lurking. On March 14, Moody’s Investors Service cut its outlook for the entire US banking system, to negative from stable, citing the run on deposits at SVB. Two other lenders have gone bust, too: crypto players Silvergate Capital Corp. and Signature Bank.

The death spiral at SVB began with credit ratings. In early March, Moody’s informed the bank it was considering a multilevel downgrade that would have pushed it to the brink of junk-bond status. In response, Goldman Sachs Group Inc., hired by SVB to help it raise fresh capital, jumped into action. It offloaded a chunk of SVB’s investment portfolio at a $1.8 billion loss. On Wednesday, March 8, Goldman pitched a plan to investors to help plug that hole, and then some, by raising $2.25 billion in capital from General Atlantic and other investors. It didn’t work.

“The Catch-22 of the situation is that, by announcing the need to raise capital, they in essence accelerated customer concern, resulting in the liquidity stress that ultimately caused their collapse,” says Olivier Sarkozy, managing partner at Further Global, a private equity firm. “It would have been far better to announce the $2.25 billion they were seeking had been secured.”

In the bankers’ view, they were racing the clock to defuse the Moody’s threat. That didn’t leave them enough time to canvass the market, line up the funding and present a neatly put-together deal. Then CEO Becker held what turned out to be a disastrous call with VCs and limited partners. “Stay calm,” he said. It was too late. Bankers tapping away at their phones watched, aghast, as social media lit up with reports of a viral bank run.

By 3 p.m. the next day, Thursday, March 9, the news out of Santa Clara had reached the White House. Such high-profile venture firms as Union Square Ventures and the Peter Thiel-backed Founders Fund had already been encouraging the companies they invested in to yank their deposits, almost all of which were uninsured because they exceeded the $250,000 limit on federal guarantees. Founders Fund had drained its own accounts from the bank by midday.

The message was echoed by other VC titans. Bookface, an internal social network for founders of companies backed by the startup accelerator Y Combinator, was abuzz, as was a messenger thread of more than 1,000 founders from Andreessen Horowitz, with many encouraging each other to pull cash from the bank. By day’s end, depositors had tried to withdraw $42 billion.

Silicon Valley bigs—many with a libertarian, get-government-off-our-backs bent—quickly looked to Washington. They implored the administration to step in and rescue depositors, or risk having banks topple like dominoes. On Friday morning, March 10, the new White House Chief of Staff Jeff Zients and Lael Brainard, the former Fed vice chair who’d just become director of Biden’s National Economic Council, went to the Oval Office to brief the president. They told him there was potential for the bank to be shut down—as it was later that day, even before the close of financial markets—and that there was a possibility of contagion, according to a source familiar with the discussion.

From dawn to midnight the following day, Zients, Brainard and other aides working in the White House’s West Wing developed a set of options. By Saturday afternoon, it was clear that regulators would probably need to take action to prevent contagion. When Treasury Secretary Janet Yellen and top aides briefed Biden on the options, he was adamant: The federal government stood ready to protect depositors, small businesses and employees. Executives and investors could take their lumps. He didn’t want taxpayers to be on the hook, and any deal had to include firing management.

In the Bay Area, Iba Masood was struggling to make sense of it all. Masood, the co-founder and CEO of a tech startup called Tara.AI, had raised $14 million from investors. And she’d parked every penny of the company’s money at SVB. Masood began firing off emails and texts—hundreds and hundreds of them, until her carpal tunnel flared up. Tara.AI, she told her investors, was facing a perilous squeeze. She hopped in her C300 Mercedes-Benz  and raced through a driving rainstorm to a Bank of America branch. Drenched, she hastily opened a corporate account. She felt good, she said, confident. She’d wake up the next morning and have the money in the new account.

But there was no next morning for SVB. It was too late. The money was frozen.

Trae Stephens, a partner at Founders Fund, said the firm had had a long, fruitful relationship with SVB. But that long, fruitful relationship wasn’t going to help Thiel’s firm honor its fiduciary duty to look out for its backers and limited partners. And it wasn’t going to help all those startups make payroll.

“The most inconvenient thing about the situation last week was actually the name of the bank. It got instantly politicized,” Stephens said in a March 14 interview on Bloomberg Television. To him, the idea that Washington had somehow bailed out rich VCs and techies is hogwash. “The government did what it needed to protect and shore up these smaller regional banks, to ensure there weren’t any further runs. It seems like they acted quickly—and did the right thing.” —

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