The Goldman Sachs Group (GSG) is under federal investigation for its attempt to raise money for Silicon Valley Bank (SVB) before its collapse in March.
The role Goldman’s played in the failure of SVB is part of the probe by the Justice Department and the Securities and Exchange Commission, which have been reviewing the causes since March.
SVB was seized by the Federal Deposit Insurance Corporation (FDIC) on March 10, following a run on the bank amid concerns regarding its ability to guarantee its customer deposits, of which 94 percent were uninsured.
The California-based lender was unable to make assurances to its depositors due to losses in its portfolio, which consisted of long-dated U.S. Treasurys made worthless by surging interest rates.
The collapse of SVB sparked runs at other banks which ended up contributing to the collapse of First Republic and Signature Bank, raising uncertainty over U.S. financial stability.
Goldman Sachs’s Failed Attempt to Save SVB Is Partially Blamed for Bank Run
Goldman has been attacked by critics for its decision to purchase billions in securities from SVB and to act later as an adviser on the attempted bond purchase just days before the bank failed.Democrat lawmakers in Congress immediately called for a federal investigation into Goldman’s relationship soon after the collapse and demanded that regulators examine whether the investment bank’s profits handling the $21.45 billion trade for SVB should be repossessed.
The two separate transactions were handled by different departments at Goldman, according to standard industry practice.
SVB hired GSG in late February to help boost its available liquidity after the bank anticipated a downgrade from credit rating agency Moody’s that would have pushed it to the brink of junk-bond status.
The investment bank formulated a plan to raise new capital for the bank by agreeing to buy part of SVB’s portfolio of U.S. Treasurys and other government-backed debt.
SVB then offloaded $23.97 billion in Treasurys to Goldman at “negotiated prices,” generating $1.8 billion in losses.
GSG’s agreement to underwrite the regional bank’s bond portfolio allowed it to pocket fees from selling the portfolio back into the market at a higher price.
On March 8, Goldman, in a botched attempt to cover SVB’s losses, then formulated a plan to raise $2.25 billion in liquidity from General Atlantic and other investors.
The next day, as news spread of SVB’s capital shortfall, customers pulled $42 billion of deposits from the bank, or roughly a quarter of its year-end deposits, causing the deal to fail.
Goldman was forced to abandon the plan after SVB’s share price plummeted and the run on its deposits intensified, sparking a financial panic that nearly tanked the U.S. regional banking sector.
Rival lenders and investors have blamed Goldman for failing to anticipate the crisis by not building up the capital in advance and thus shocking the market.
Investors Sue Goldman for SVB Debacle
In addition to the government investigations in SVB, Goldman is among the underwriters named as defendants in a class-action lawsuit filed by investors who alleged that several stock and debt offerings by SVB in 2021 and 2022 “contained material misstatements and omissions.”The SEC filing revealed that Goldman is among the underwriters named as a defendant in a securities class-action lawsuit filed on April 7 in the U.S. District Court for the Northern District of California, related to SVB’s collapse.
The plaintiffs accuse GSG of violating federal securities laws, alleging that the offering documents contained material misstatements and omissions. The complaint seeks compensatory damages in unspecified amounts.
GSG admitted that it had done “business with SVB in or around March 2023, when SVB engaged the firm to assist with a proposed capital raise and SVB sold the firm a portfolio of securities.”
“The firm is also cooperating with and providing information to various governmental bodies in connection with their investigations and inquiries into SVBFG and its affiliates (collectively ‘SVB’), including the firm’s business with SVB in or around March 2023, when SVB engaged the firm to assist with a proposed capital raise and SVB sold the firm a portfolio of securities,” according to Goldman’s SEC filing.
