Goldman’s roles in the Silicon Valley Bank crisis are raising questions.Credit…Richard Drew/Associated Press
Questions about Goldman’s pay for S.V.B.
As an adviser to Silicon Valley Bank, Goldman Sachs last week tried to pull off a last-minute capital raise to save the firm from collapse. But the Wall Street giant also had another role in the bank’s final days, for which it’s expected to collect a massive fee: It bought a cache of the bank’s debt in a deal that ultimately led to concerns about the bank’s viability.
Goldman’s payday: In exchange for buying $21.4 billion of debt from Silicon Valley Bank — which the failed lender booked at a loss of $1.8 billion — Goldman is likely to make more than $100 million, DealBook has learned.
Goldman wore multiple hats. After Moody’s privately warned Silicon Valley Bank in early March that it faced a possible downgrade, the bank called on Goldman for advice to help it shore up its books. The two-part plan of raising capital and buying debt couldn’t save Silicon Valley Bank. Meanwhile, the compensation Goldman collected and how it managed the relationship with the bank could raise new questions.
Did Goldman operate at “arm’s length?” It offered Silicon Valley Bank the opportunity to hire another adviser to work on the bond deal, but the lender declined, DealBook has learned. Banks often perform multiple roles for their clients — and take pains to say they are doing so in an arm’s length manner that maintains the necessary walls between teams. But, even still, these deals raise questions — all the more in high-stakes situations like this.
Will the fees be thrown into the clawback debate? After the government introduced extraordinary measures to protect the bank’s depositors, there is expected to be heightened regulatory scrutiny. Senator Elizabeth Warren, Democrat of Massachusetts, and others are demanding a clawback of the bonuses the bank paid to its executives and the profits they made from selling stock. The Justice Department, which is investigating the bank’s collapse, recently rolled out a pilot program for clawing back incentives (more on that below).
But while that all may raise attention and debate, it’s not clear that Goldman’s fee is directly relevant to any of these high-level discussions. Bankruptcy judges also typically allow companies to pay for services prior to the bankruptcy, so long as they are negotiated at fair prices and considered to have been made at “arm’s length.” Given the demands of the bank’s creditors, we may soon find out how a bankruptcy judge feels about this one. (If a clawback is granted, could that money go to the F.D.I.C.?)
It’s not uncommon for banks to charge such fees. When buying assets the way Goldman did, the fee is usually in the form of a discount to the market value of the assets. Goldman is paid to cover the financial risk of acquiring a debt pile of this size before syndicating it out. In this case, the assets were mostly highly liquid. Goldman bought the bank’s loans at a hefty loss for S.V.B. of $1.8 billion. The bank had to disclose that without having completed a deal to raise capital — an admission that spooked the markets and ultimately led to its failure.
A spokesman for Goldman declined to comment.
HERE’S WHAT’S HAPPENING
Credit Suisse shares hit a record low after its biggest backer rules out more investment. The stock fell sharply after Saudi National Bank said it would not put more money into the Swiss lender. Credit Suisse’s turnaround plan to spin out its investment bank and focus on wealth management has been complicated by the fallout from the collapse of Silicon Valley Bank. Shares in other European banks fell on Wednesday.
OpenAI unveils a new version of ChatGPT. The start-up launched the latest iteration of the chatbot, upping the ante in the A.I. race; The Times’s Cade Metz writes that it’s more capable, but not perfect. Meanwhile, Google is rolling out A.I. features in core products like Gmail and Google Docs.
A senior Abu Dhabi royal reportedly invests in ByteDance. G42, an A.I. company controlled by Sheikh Tahnoon bin Zayed Al Nahyan, bought shares in the Chinese tech giant from existing investors at a $220 billion valuation, according to Bloomberg. That’s much less than what the TikTok owner has been valued at in recent years, as ByteDance faces political scrutiny in Washington.
Meta will lay off another 10,000 workers. It’s the second round of cuts announced by the social media giant since November as the company embarks on what Mark Zuckerberg, its C.E.O., calls the “year of efficiency” — streamlining operations amid a larger downturn in digital advertising and tech spending.
Washington’s big banking debate heats up
The debate over why Silicon Valley Bank and Signature Bank failed is intensifying in Washington. But discussions about how to prevent such bank collapses in the future are getting complicated, including within the Democratic Party.
Decisiveness in Washington is giving way to extended deliberations. The Times takes a close look at how regulators — persuaded by influential financial advisers like Blair Effron of Centerview Partners and Peter Orszag of Lazard — ended up creating a sweeping rescue for U.S. banks.
What to do next is less clear. The Fed is reportedly considering tougher rules for midsize banks, including reviewing liquidity requirements and its stress tests. Some Democratic lawmakers, like Senator Elizabeth Warren of Massachusetts and Representative Katie Porter of California, are pushing to restore banking rules rolled back during the Trump administration, a move that raised the threshold for “too big to fail” banks from $50 billion in assets to $250 billion. And Representative Maxine Waters of California said Congress should weigh increasing the F.D.I.C.’s deposit insurance cap.
But not all Democratic senators and their allies agree that the 2018 deregulation was to blame here: Both Jon Tester of Montana and Angus King, independent of Maine, said they stand by their votes for the rollback five years ago. That divide, combined with broad Republican opposition to tougher banking rules, means it’s hard to see the legislative path ahead.
Fears about regional lenders continue to ease. Shares in smaller banks like First Republic, Western Alliance and PacWest Bancorp all jumped on Tuesday, as investors were reassured by the federal banking backstop. Charles Schwab’s stock also rose on Tuesday as the firm’s C.E.O. said its bank was still receiving deposit inflows.
The work of cleaning up the failed banks isn’t over. Investment firms like Apollo and Blackstone are weighing bids for parts of Silicon Valley Bank’s loan book, perhaps with backing from venture capitalists. And creditors have banded together in anticipation of a potential bankruptcy filing by the bank.
Meanwhile, regulators have started soliciting bids for Signature Bank.
In other news: Meet Silicon Valley Bank’s cleanup C.E.O., a veteran of Bank of America, Fannie Mae and Lending Club. The journalist Roger Lowenstein weighs in on the potentially dangerous consequences of the bank rescue. KPMG defended its auditing work for S.V.B. and Signature Bank. The venture firm Union Square Ventures reportedly warned portfolio companies last November about diversifying their banking relationships. And short sellers cleaned up on Monday.
BlackRock’s Fink sees a new era in banking
Larry Fink, BlackRock’s chief, has used his influential annual letter to push the world’s business leaders to do more on climate change and to turn their words about corporate purpose into action. His letter for this year, which came out on Wednesday, continues that theme but also carries a timely (and stark) warning: The banking sector will need to transform itself in the wake of the collapse last week of Silicon Valley Bank in order to survive.
Bank stocks may have rebounded, but fears of contagion — and recession — persist. Fink cautioned that lenders will have to operate differently in an era of elevated interest rates; they will also face tougher rules and greater regulatory oversight as a consequence of the failure of Silicon Valley Bank and Signature Bank. And, he said, they’ll need to hold more capital on their books (which they will likely need to top up through the capital markets) to avoid the kind of “liquidity mismatch” that brought down S.V.B.
Previous Fed cycles of rapid interest rate tightening “led to spectacular financial flameouts” like the bankruptcy of Orange County, Calif., in 1994, he wrote, and the savings and loan crisis of the 1980s and ’90s. “We don’t know yet whether the consequences of easy money and regulatory changes will cascade throughout the U.S. regional banking sector (akin to the S.&L. crisis) with more seizures and shutdowns coming,” he said.
Founded 35 years ago, BlackRock is the world’s largest asset manager with $8.6 trillion under management at year end (down from $10 trillion at the end of 2022). BlackRock has gained outsize influence in shaping the investment philosophy of traders big and small. It has also generated plenty of criticism from the political right for its embrace of E.S.G., or environmental, social and governance investing practices.
In his 20-page letter, Mr. Fink also addressed inflation (it will linger at 3.5-4 percent) and proxy voting (proxy advisers could do more to represent and champion shareholders’ views).
Will S.V.B.’s leaders have to return some pay?
Silicon Valley Bank’s failure came just as the Justice Department was set to launch a new pilot program to hold executives personally accountable for corporate wrongdoing by clawing back pay and bonuses. It goes into effect on Wednesday and applies to all corporate criminal enforcement actions, meaning that the bank and its management could end up being part of that experiment.
Calls for clawbacks are proliferating. Some lawmakers, like Senator Elizabeth Warren, Democrat of Massachusetts, are focused on how to take back bank executives’ compensation and bonuses. Others, like Representative Ro Khanna of California, who represents the district where Silicon Valley Bank was headquartered, are targeting gains from stock sales that some executives made just ahead of the collapse.
Companies that settle with the government and claw back compensation may benefit under the new program. Businesses that quickly hand over information and reclaim money, among other measures, can negotiate for lower fines and better deals. The three-year pilot program is part of a wider push by the Biden administration for more corporate and executive accountability.
Executives could also be forced to return profits if there was insider trading. The share sales by S.V.B. executives will likely come under scrutiny from both the D.O.J. and the S.E.C., lawyers say (both agencies declined to comment). Longstanding rules may require that any money made from those trades be returned if there’s a conviction or settlement. Some executives, including the bank’s former C.E.O., Greg Becker, recently sold stock under plans that were set up before the bank ran into trouble. But that is a defense that can be raised against accusations of insider trading, not a guarantee of immunity. Lawmakers are calling for executives to return the money voluntarily.
THE SPEED READ
Apollo and the Abu Dhabi Investment Authority agreed to buy Univar, a chemical company, for $8.1 billion. (WSJ)
Diamond Sports Group, a giant owner of regional sports T.V. networks affiliated with Sinclair Broadcast Group, filed for bankruptcy. (CNBC)
Best of the rest
Disney’s Marvel has gone to court to compel Reddit to reveal who leaked a transcript of dialogue for “Ant-Man and the Wasp: Quantumania” on its site. (Variety)
“Bosses Are Catching Job Applicants Using ChatGPT for a Boost” (WSJ)
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