Who and how in America turned a blind eye to the flaws of Silicon Valley Bank
Is it possible that no one has noticed the difficulties of Silicon Valley Bank? That's who praised the bank until just before the collapse. The article by Emanuela Rossi
There are fears of a long wave of repercussions on the markets after the bankruptcy of Silicon Valley Bank (SVB), a bank based in California and the sixteenth largest in the United States.
The SVB crash – the second ever in America after that of the Washington Mutual Bank, according to the Wall Street Journal – also risks bringing some scandal to light. For example, the fact that important managers of another US bank, First Republic Bank , sold 12 million dollars in securities in the two months preceding the crisis and part of the sales – reports Il Sole 24 Ore – even on the eve of the collapse of Silicon Valley Bank. For this reason, investigations into former SVB executives are underway for suspected insider trading.
In short, only now that Pandora's box has been opened does everyone realize the evils it contained. But did anyone doubt before?
THE GOOD HEALTH OF SILICON VALLEY BANK, ACCORDING TO KPMG
As recalled by the WSJ , Silicon Valley Bank went bankrupt only 14 days after Kpmg issued the bank with an audit certifying its good health, dated February 24th. It did the same with the other bank that went bust, Signature Bank. What the accounting firm knew about SVB's financial situation is likely to be the subject of regulatory scrutiny and legal action.
If initially Kpmg did not want to comment, later Paul Knopp, number one of the company in the United States, said in a note released by the Financial Times – as reported by Reuters – that Kpmg's audit work considered all the facts available at the time. period and that in the following days it was "market-driven events" that led to the bankruptcy of the two credit institutions.
“It is important to recognize that audit opinions, which concern only the company's financial statements and internal controls, are based on the evidence available up to the date of the opinion,” he said.
GOLDMAN SACHS PLAN TO RAISE CAPITAL
Even Goldman Sachs has recently had to deal with Svb as some of the institute's executives have turned to the investment bank with the general guidelines for a capital raising plan. The list of possible investors included two private equity firms, General Atlantic and Warburg Pincus.
The executives, Mf writes, wanted to do a private stock placement, an operation in which they would line up investors to buy a set number of shares at a set price.
All to be done quickly given that it was a capital increase to be completed to save Silicon Valley Bank from collapse and with Moody's breathing down his neck who had warned of a possible downgrade. Goldman Sachs also appears to have had “another role in the bank's final days, for which it is expected to collect a huge fee: It bought a portion of the bank's debt in a deal that ultimately led to concerns about the bank's profitability. itself".
In practice, in exchange for the purchase of $21.4 billion of debt from the SVB – which the bankrupt creditor posted at a loss of $1.8 billion – the consulting bank could gain around $100 million, according to reports. reported to the New York Times by people inside the matter, who asked to remain anonymous as it is confidential information.
MOODY'S VOTE
What about the rating agencies, such as Moody's, Standard & Poor's and Fitch which control about 95% of the ratings?
A few days before the crash, Moody's had assigned an "A3" rating to Svb's solvency, i.e. "medium-high creditworthiness" only to then – very shortly – threaten a possible downgrade and, on March 14, downgrade the rating of the other bank bankrupt, Signature Bank, to “junk”. Not only that: the rating agency has placed First Republic Bank, Zions Bancorp, Western Alliance Bancorp, Comerica Inc, Umb Financial Corp and Intrust Financial Corp. under observation in view of a possible downgrade and has lowered the outlook on the US banking system to “negative” from “stable” as a result of the rapidly deteriorating operating environment following the collapse of Silicon Valley Bank, Silvergate Bank and Signature Bank.
“The riskiness of this bank (Svb, ed) and of others with a similar business model was quite evident, because it was characterized by a very high degree of concentration both in terms of assets and liabilities. This business model was very risky” commented Marcello Messori, professor of European Economics at Luiss, interviewed by Panorama . According to Messori there is a need for “increasingly rigorous regulation. A balance between market evolution, self-regulation and regulation is essential. We need to create standards. And it is an endless job because the market evolves”. Certainly, he highlighted, “Europe is a place where regulation is very effective, compared to the USA. In the euro area we could not have had a case of SVB”.
THE FORBES RANKING
But that's not all because Silicon Valley Bank, as reported by Radiocor , was included by Forbes in the ranking of the best US banks last month, placing it in twentieth place ahead of all the major lenders in the country. Not only that: on March 6, Camilla Conti wrote in La Verità, Svb had given the news on their social profiles, underlining their presence in the annual ranking for the fifth consecutive year.
WHAT ABOUT THE FED?
In all this uproar there is a stone guest, the Federal Reserve, whose regulation leaves ample room for maneuver to non-systemic banks. "What the Fed does not forgive are the flaws in the regulation and supervision system" said the Nobel Prize for Economics, Joseph Stiglitz, in an interview with Repubblica, according to whom they were not imposed "on medium-small banks effective and stringent stress tests. Trump's deregulation is to blame: among other things, Jerome Powell, the current Fed president, was part of the working group wanted by the former president to weaken the Dodd-Frank law, which led to the deregulation that many failures it has caused".
It is true that supervision has not been abolished but transferred to the twelve Feds but, Stiglitz wonders, “the San Francisco Fed, responsible for the Silicon Valley area, has the same capacity, the same rigour, the same independence as the central Washington? Let's look at it differently: do young Silicon Valley startuppers, focused on technological innovation, have the time and the expertise to go and look at the soundness of their bank and the effectiveness of surveillance? It is no coincidence that the crisis broke out in the cradle of hi-tech: because technology has acted as a driving force, which allows huge sums to be moved online in real time beyond any control. For this – is the conclusion of the Columbia University economist – multiplied vigilance was needed”.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/silicon-valley-bank-chi-ha-chiuso-un-occhio/ on Sun, 19 Mar 2023 06:37:41 +0000.