The effort to wind down Silicon Valley Bank was marred by an unmotivated seller, infighting between regulators and, ultimately, a failed auction.
(Bloomberg) — The effort to wind down Silicon Valley Bank was marred by an unmotivated seller, infighting between regulators and, ultimately, a failed auction.
It’s left a mess that government officials, banking agencies and potential bidders are still trying to work out as they also navigate a deal for Signature Bank and try to bolster First Republic Bank.
When a US regulator seizes a bank, it will ideally shut the doors on a Friday and secure one buyer for everything by Sunday night, just in time to calm markets before they reopen. Almost a week after SVB was put into receivership, that white knight still hasn’t emerged.
“There’s no reason to delay these things,” said Abbott Cooper, an activist investor who worked on transactions involving failed banks during the 2008 financial crisis. “It’s better to get deals done.”
This account of how a frenzied weekend of talks ended up with no savior for SVB and a historic government intervention is based on accounts from numerous people with knowledge of the negotiations, all of whom asked not to be identified discussing private details.
Giant Liability
Martin Gruenberg, chairman of the Federal Deposit Insurance Corp., has helped sell a lot of banks in his time. He was already on the agency’s board when JPMorgan Chase & Co. bought Washington Mutual’s banking operations out of receivership, and has said the FDIC has been appointed receiver on more than 525 failed banks since 2007.
But SVB was different. A vast amount of its customer deposits fell outside the FDIC’s guarantee cap of $250,000, so finding a buyer — almost certainly another bank — to take on the giant liability was a tough sell. Any sweetener, like an agreement with the FDIC to help shoulder future losses, would risk leaving the agency on the hook for more than its share. The FDIC’s own rules force it to seek the least costly outcome for itself, and in this case, that was potentially to let SVB fail and pay out the insured losses only, regardless of the broader consequences.
That’s the point Gruenberg stressed in frantic meetings last weekend at FDIC’s headquarters and on the phone with top officials from the Federal Reserve and the Treasury Department, the people with knowledge of the matter said.
Government representatives had bigger problems on their minds. The cheapest option for the FDIC might come at an unthinkable price to the US economy: startups were already warning that they might not be able to make payroll, and it was unclear how long the Silicon Valley ecosystem could continue without its go-to bank. At the same time, anything that looked like a government bailout was out of the question — the White House was adamant about that. SVB needed to be bought, and fast.
As the negotiations dragged into Saturday night, the debate got increasingly tense, the people said, with Gruenberg’s own colleagues eventually pressing him to find a way to appease officials across government.
The only way to sidestep the obligation to protect the FDIC’s funds, Gruenberg said, was for the government to say that SVB presented a systemic risk to the US economy. That extraordinary step would mean the FDIC’s pot could be used to pay out uninsured losses, with banks that pay into the fund as a regulatory obligation eventually covering the excess costs.
By the time government officials agreed that’s what needed to happen — well into Sunday — the window to find a buyer was closing fast.
Read more: Three Days in Washington: How a Frenzied Bank Rescue Took Shape
Still, even once an auction started, officials were reluctant to let the biggest US banks make a bid. A bank like JPMorgan risked exceeding limits on its deposit base, and regulators weren’t willing to waive the rules to let them in.
What was left on the table wasn’t necessarily a compelling prospect. To some of the people close to the negotiations, it felt like Gruenberg had only agreed to an auction to prove just how uninterested the US banking industry was. Not only would a buyer need to take on a sprawling book of liabilities — albeit with a strong brand and a team of bankers already rushing to win back clients — they’d also be facing a barrage of political criticism and a tough regulatory market for getting deals done.
Tough Antitrust
Even in a more merger-friendly environment, large banks might still have been reluctant to take on a rescue deal after being burned by the same sort of transactions in 2008. JPMorgan agreed to purchase Bear Stearns that year, only for lawmakers to later target banks with recriminations for acquiring other businesses at firesale prices.
It also bought WaMu, the savings-and-loan giant whose collapse marked the biggest-ever bank failure. That deal proved to be so regrettable that JPMorgan sued the FDIC in 2013, alleging the regulator reneged on a promise to shield the bank from lawsuits against WaMu. JPMorgan sought $1 billion, and the case settled three years later for $645 million.
“We would not do something like Bear Stearns again — in fact, I don’t think our board would let me take the call,” long-time CEO Jamie Dimon said in a 2015 letter to shareholders. “These are expensive lessons that I will not forget.”
Which banks were in the running, how seriously they looked and whether anyone made an official bid for all of SVB has become a political talking point since the process failed. Treasury and FDIC officials briefed Republican senators Monday that offers were made over the weekend, but there wasn’t enough time to process them. Senator Bill Hagerty, a Republican from Tennessee, went as far as to say “they allowed the bid to fail.”
Pittsburgh-based PNC Financial Services Group Inc. held brief discussions with FDIC about an SVB acquisition, but decided against pursuing a bid, people with knowledge of the matter said. Representatives for the FDIC, Fed and PNC declined to comment. The Treasury and the White House didn’t immediately respond to requests for comment.
Second Round
Four days after the government promised to make all SVB depositors whole, the bank’s new management team doesn’t seem any closer to finding a buyer. Politicians have so far worked hard to signal to Americans that this isn’t a taxpayer-funded bailout, and it’s unlikely they’ll stop stage-managing the process now: any buyer has to be one that doesn’t rile objections on either side of the aisle.
“Is this going to be like a ‘no good deed goes unpunished’ situation?” said Cooper. “The bigger the bank, the bigger that concern.”
Bidders are circling SVB, but only for pieces of the bank: A $74 billion loan book looks appealing to giant private equity firms, while a group of SVB executives overseeing the bank’s small but thriving wine-lending portfolio are already trying to revamp the unit. Meanwhile the holding company, SVB Financial Group, is exploring strategic options for various parts of the business that are separate from SVB.
Buying a failed bank in its entirety isn’t always a bad deal. In 2009, Steven Mnuchin, then CEO of hedge fund Dune Capital, led a group of investors who bought failed mortgage lender IndyMac Bank for $13.9 billion. Mnuchin and his partners received billions in government incentives. After Mnuchin renamed the bank OneWest and sold it in 2015, Bloomberg News reported that he may have personally received about $380 million in sale proceeds and dividends.
Bidders looking at a deal for the whole of a bank like SVB usually get more time, according to Tim Yeager, a professor at the University of Arkansas and former St. Louis Fed economist, who said that FDIC sales of smaller community banks typically take place over two to three weeks.
For the time being, the limits on what the big banks can do are still in place. Insiders are saying privately they hope regulators will loosen them for the next stages of the auction, and for the process to find a buyer for Signature Bank.
“When you do another round, it’s like when you’re listing a house for a second time — you lower the price,” said Yeager. “The bidders are going in, getting a quick glimpse of what is there. And they don’t like what they’re seeing, so they’re not bidding.”
–With assistance from Katanga Johnson, Craig Torres, Max Reyes, Austin Weinstein, Sonali Basak, Gillian Tan, Jennifer Jacobs and Christopher Condon.
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