Silicon Valley Bank's demise began with downgrade threat

That phone call, described by two people familiar with the situation, began the process toward Friday's spectacular collapse of the startup-focused lender, the biggest bank failure since the 2008 financial crisis.

Friday's collapse sent jitters through global markets and walloped banking stocks. Investors worry that the Federal Reserve's aggressive interest rate increases to fight inflation are exposing vulnerabilities in the financial system.

Details of SVB's failed response to the prospect of the downgrade, reported by Reuters for the first time, show how quickly confidence in financial institutions can erode. The failure also sent shock-waves through California's startup economy, with many companies unsure how much of their deposits they can recover and worrying about how to make payroll.

The Moody's call came after the value of the bonds where SVB had parked its money fell due to the higher interest rates.

Worried the downgrade could undermine the confidence of investors and clients in the bank's financial health, SVB Chief Executive Greg Becker's team called Goldman Sachs Group Inc (GS.N) bankers for advice and flew to New York for meetings with Moody's and other ratings firms, the sources said.

The sources asked not to be identified because they are bound by confidentiality agreements.

SVB then worked on a plan over the weekend to boost the value of its holdings. It would sell more than $20 billion worth of low-yielding bonds and reinvest the proceeds in assets that deliver higher returns.

The transaction would generate a loss, but if SVB could fill that funding hole by selling shares, it would avoid a multi-notch downgrade, the sources said.


REUTERS