Goldman Sachs Bought SVB’s Bond Portfolio That Led to Massive Losses and Bank Run

Goldman Sachs headquarters in New York City, on Oct. 15, 2015. Mark Lennihan/AP Photo

The parent of the failed Silicon Valley Bank (SVB), Silicon Valley Bank Financial Group, said that the Goldman Sachs Group (GSG) was responsible for buying SVB’s bond portfolio that booked $1.8 billion loss, setting off a calamitous bank run.

SVB Financial said the transaction by Goldman Sachs set in motion SVB’s collapse, causing the bank to be taken over by the Federal Deposit Insurance Corporation (FDIC) on Mar. 10, reported Reuters.

The implosion was the second -argest bank failure in history and the largest since Washington Mutual in 2008.

A massive capital shortfall spurred the bank to attempt raising more liquidity by selling shares, but the joint plan with GSG sparked an old-fashioned bank run that led to its rapid downfall.

Capital Losses Leads to Botched Liquidity-Raising Plan With Goldman

The loss on its portfolio eventually led to SVB’s failed attempt at a $2.25 billion stock sale on Mar. 8 while using Goldman Sachs as an adviser, admitted the bank on Mar. 13.

The capital-raising plan collapsed after depositors fled and investors worried that the troubled bank would have need a further surge of money.

According to SVB, the portfolio that the California-based lender sold to GSG consisted mostly of U.S. Treasurys, with a book value of $23.97 billion.

The bank said the transaction was carried out “at negotiated prices” and raised $21.45 billion in proceeds, the lender added.

However, GSG’s bond portfolio purchase was handled by a division that was separate from the unit handling SVB’s stock sale, said Reuters.

SVB, which was once the nation’s sixteenth-largest bank, was shut down by the FDIC after 40 years in operation, forcing regulators to move to protect customers from a panic as the bank faced a liquidity crunch after losing $1.8 billion.

The Silicon Valley Bridge Bank was set up by regulators in its place, with a new CEO, Tim Mayopoulos, being assigned to run its remaining operations. A bridge bank is an institution created by a national regulator or central bank to operate a failed bank until a buyer can be found.

SVB witnessed massive losses after higher interest rates sparked billions in losses on a $21 billion bond portfolio, after the Federal Reserve’s aggressive monetary policy over the past year; as bond prices fall, yields rise.

A 4.5 percent hike in interest rates since March 2022 saw SVB’s bond holdings plunge in value after it bought the securities when borrowing rates were relatively low.

According to SVB Financial’s mid-quarterly report, the company’s $21 billion bond portfolio had a yield of 1.79 percent and a duration of 3.6 years.

The three-year U.S. Treasury note currently yields 4.0 percent, a major difference from the pre-2022 levels when SVB made its purchase.

Signature Bank Failure Compounds the Financial Panic

Meanwhile, federal regulators announced on Mar. 10 that they had shut down the New York-based Signature Bank to protect consumers and the U.S. financial system following the collapse of SVB.

Signature Bank, which was founded in 2001, was popular among cryptocurrency companies and provided deposit services for its clients’ digital assets, but did not make loans collateralized by them.

“The contagion risk is that there is a run on other banks that are financed by a large fraction of uninsured deposits,” Itamar Drechsler, a finance professor at Wharton, told Business Insider.

“Many of these accounts did not think there was any problem to be concerned about before the news about SVB and the other banks that have failed, but now they have a reason to be concerned and to take out their deposits and move to other banks.”

Drechsler told Business Insider in warning that similar deposits in the form of corporate checking accounts or cash that SVB used to buy long-maturity, fixed-rate assets such as mortgage-backed securities are at particular risk.

Reuters contributed to this report.