Silicon Valley Bank Was a Wall Street IPO Pipeline in Drag as a Federally-Insured Bank; FHLB of San Francisco Was Quietly Bailing It Out

[Gunnar Larson]

https://wallstreetonparade.com/2023/03/silicon-valley-bank-was-a-wall-street-ipo-pipeline-in-drag-as-a-federally-insured-bank-fhlb-of-san-francisco-was-quietly-bailing-it-out/


By Pam Martens and Russ Martens: March 13, 2023 ~

If you want to genuinely understand why Silicon Valley Bank (SVB) failed
and why Jerome Powell’s Fed led the effort yesterday to make sure $150
billion of the bank’s uninsured depositors’ money would be treated as FDIC
insured and available today, you need to take a look at how the bank
defined itself right up until it blew up on Friday. (That history is still
available at the Internet Archives’ Wayback Machine at this link. Give the
page time to load.)

This was a financial institution deployed to facilitate the goals of
powerful venture capital and private equity operators, by financing tech
and pharmaceutical startups until they could raise millions or billions of
dollars in a Wall Street Initial Public Offering (IPO). The bank was also
involved in managing the wealth of those startup millionaires or
billionaires once they struck it big in an IPO.

Many of the former startup companies also continued to keep their operating
money at the bank – in many cases in the millions of dollars, ignoring the
fact that just $250,000 of that was insured by the Federal Deposit
Insurance Corporation (FDIC). Last Friday, dozens of publicly-traded
companies made filings with the Securities and Exchange Commission
indicating that they had large sums of uninsured deposits now frozen at
Silicon Valley Bank. Several indicated that the amounts represented 23 to
26 percent of the company’s cash and/or cash equivalents.

Roku, Inc., the publicly-traded manufacturer of digital media players for
video streaming, reported the following to the SEC: “The Company has total
cash and cash equivalents of approximately $1.9 billion as of March 10,
2023. Approximately $487 million is held at SVB, which represents
approximately 26% of the Company’s cash and cash equivalents balance as of
March 10, 2023.”

Publicly-traded Oncorus, Inc., a biopharmaceutical company focused on
developing RNA-based medicine for cancer patients, reported the following
to the SEC: “The Company informs its investors that it has deposit accounts
with SVB with an aggregate balance of approximately $10 million, which is
approximately 23% of the Company’s total current cash, cash equivalents and
short-term investments. In addition, the Company has a standby letter of
credit in place with SVB of approximately $3.4 million securing obligations
under its lease agreement with IQHQ-4 Corporate Drive, LLC.”

In big, bold type on its website, Silicon Valley Bank bragged that “44% of
U.S. venture-backed technology and healthcare IPOs YTD [year-to-date] bank
with SVB.”

To put it bluntly, this was a Wall Street IPO machine that enriched the
investment banks on Wall Street by keeping the IPO pipeline moving; padded
the bank accounts of the venture capital and private equity middlemen; and
minted startup millionaires for ideas that often flamed out after the
companies went public. These are the functions and risks taken by
investment banks. Silicon Valley Bank – with this business model — should
never have been allowed to hold a federally-insured banking charter and be
backstopped by the U.S. taxpayer, who was on the hook for its incompetent
bank management.

We say incompetent based on this fact alone (although there were clearly
lots of other problem areas): $150 billion of its $175 billion in deposits
were uninsured. The bank was clearly playing a dangerous gambit with its
depositors’ money.

Adding further insult to U.S. taxpayers, the Federal Home Loan Bank of San
Francisco was quietly bailing out SVB throughout much of last year. Federal
Home Loan Banks are also not supposed to be in the business of bailing out
venture capitalists or private equity titans. Their job is to provide loans
to banks to promote mortgages to individuals and loans to promote
affordable housing and community development.

According to SEC filings by the Federal Home Loan Bank of San Francisco,
its loan advances to SVB went from zero at the end of 2021 to a whopping
$15 billion on December 31, 2022. The SEC filing provides a graph showing
that SVB was its largest borrower at year end, with outstanding advances
representing 17 percent of all loans made by the FHLB of San Francisco.

Loan Advances Outstanding at Federal Home Loan Bank of San Francisco,
December 31, 2022

Notably, another bank which had $14 billion of loans outstanding from the
FHLB of San Francisco – First Republic Bank – saw its stock price plummet
by 14.8 percent on Friday. In premarket trading this morning, its stock was
down another 70 percent, despite the announcement of a new bailout facility
last evening by the Fed.

Western Alliance Bancorp, also on the FHLB of San Francisco’s list of its
top 10 borrowers, saw its stock close with a loss of 20.88 percent on
Friday. It had lost another 29 percent in premarket trading this morning.

Another member of the top 10 borrowers at FHLB of San Francisco, Silvergate
Bank, announced last Wednesday that it was closing shop and liquidating.
Silvergate’s problem stemmed from the hot money it held in deposits from
crypto companies heading for the exits as investigations began into its
role in potentially laundering money for Sam Bankman-Fried’s collapsed
house of frauds.

Another crypto-related bank, Signature Bank, was shuttered by New York
State regulators on Sunday, with the FDIC being named the receiver. All of
its depositors, including its uninsured depositors, will also be made
whole, according to a statement from the FDIC yesterday. Signature Bank’s
filings with federal regulators indicate that more than $79 billion of its
$88 billion in deposits were uninsured at the end of the fourth quarter of
2022.

Signature Bank was also quietly tapping into ongoing bailouts from a
Federal Home Loan Bank. In this case FHLB of New York. Its borrowings from
FHLB of New York exploded in the fourth quarter of last year, rising to
$11.3 billion. According to an SEC filing, as of September 30, 2022, it had
total borrowing capacity of $23.4 billion from FHLB New York.

We’re starting to see a pattern here. If you want to know which banks are
going belly up next, simply look at which ones took the largest loan
advances from a Federal Home Loan Bank last year. That appears to mean that
they were seeing an exodus of depositor money and needed to plug their
liquidity holes.

The new emergency lending program set up by the Federal Reserve was
announced last evening, as follows:

“The additional funding will be made available through the creation of a
new Bank Term Funding Program (BTFP), offering loans of up to one year in
length to banks, savings associations, credit unions, and other eligible
depository institutions pledging U.S. Treasuries, agency debt and
mortgage-backed securities, and other qualifying assets as collateral.
These assets will be valued at par. The BTFP will be an additional source
of liquidity against high-quality securities, eliminating an institution’s
need to quickly sell those securities in times of stress.”

The translation of the above is as follows: to prevent banks from further
panicking the markets by taking massive losses on their underwater Treasury
securities by selling them in order to meet depositor withdrawals, we’re
going to accept these Treasury securities as collateral for one-year loans
and pretend that their market value is par (the full face amount at
maturity).

It’s not clear if this new emergency bailout program from the Fed complies
with the statutory language of Dodd-Frank, which prohibits the Fed from
setting up an emergency bailout program to bail out a specific financial
institution; requires that it accept good collateral; and requires that any
new Fed emergency facilities be broad-based across the financial industry.

Federally-insured banks that did themselves in with crypto deposits or
functioned as an IPO pipeline to Wall Street, do not appear to us to
represent a broad base of the federally-insured, commercial banking
industry in the U.S. The Fed’s bailout program, once again, appears to be
rewarding hubris and enshrining moral hazard in the U.S. banking system.

Equally troubling, both Silvergate Bank and Silicon Valley Bank were
supervised by the Federal Reserve Bank of San Francisco. Why the San
Francisco Fed’s bank examiners didn’t blow the whistle on the dangerous
manner in which these banks were operating deserves its own investigation.
For years now, Wall Street On Parade has warned that the crony Fed should
be stripped of its supervision of banks.
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