Former head of Silicon Valley Bank’s Napa wine division hopes to keep his work going
On March 10, the Federal Deposit Insurance Corporation took control of Silicon Valley Bank’s operations after this financial institution’s cash shortfall triggered the largest bank failure since Washington Mutual during the height of the 2008 financial crisis.
Later the federal government moved to guarantee that bank depositors’ money would be there for them, including those with deposits that exceeded the $250,000 standard insurance level, the first time that FDIC has done this for large depositors.
Rob McMillan is a former executive vice president and founder of SVB’s Napa-based Premium Wine Division as well as author and analyst for the annual State of the Industry Report.
Interviewed just days after the bank’s collapse, McMillan, who lost his job and, as did others, the value of the shares he held in the bank, said the failure lies with venture capitalists who took to social media and urged people to withdraw their money, which in minutes created a ‘run’ on the bank. McMillan contends the bank was overall in good shape.
Media reports suggest the bank had large holdings in government bonds that were purchased when interest rates were low. Needing to raise cash, the bank was forced to sell these bonds at a discount based on interest rates lower than current levels. However, this move was not enough to stave off overwhelming cash demands by worried depositors.
Rating service DBRS Morningstar reported that Silicon Valley Bank sold $21 billion in investment securities for an after-tax loss of $1.8 billion. Just days before it collapsed, the bank experienced $42 billion in withdrawals — about a quarter of its total deposits.
“Unlike most banks, SVB had a very large fixed income securities portfolio representing more than half of total assets,” wrote the fourth-largest rating service.
It added, “There are some very specific circumstances surrounding SVB’s demise, but clearly the sudden rise in interest rates was a key part. Contributing factors include fast growth and a very narrow commercial client base that maintained deposit balances far above the Federal Deposit Insurance Corporation’s (FDIC) insured limit, making them highly vulnerable to any perceived weakness that contributed to the run on the bank. At (year-end) 2022, over 95% of deposits were uninsured.”
The following interview with McMillan is edited for clarity and length.
What are your plans now?
My focus is doing what I can to help fix problems resulting from Silicon Valley Bank’s closure. SVB had a very cool culture and everyone in its wine division wants to stay together, if possible.
So far there are seven interested parties that could be in the market for this division now, including three banks and one private financial organization.
Did you have any advance notice that this was going to happen?
I woke up last Friday surprised by hearing the news that the FDIC was taking over SVB. The night before I was thinking about purchasing more shares in the bank.
What led to the run?
It was VC (venture capital) community insanity that led to the run and closure, as tech companies were advised to withdraw their funds. No one needed to do this.
SVB was built for VCs, yet they told people to pull their money out and made it public. Later I heard that some 158 VCs had second thoughts and said that they were disappointed about their actions and would be willing to be the bank’s customers again.
This was a paper loss resulting from trying to sell bonds below their face value at a loss to quickly raise cash for our depositors at a time when the discounted value of such bonds fell by 15%. This effort was not enough. If we could have held these bonds to maturity there would not have been a loss.
How fast did these VC warnings cause a panic?
I don’t think the Federal Reserve or anyone anticipated the impact these VC communications would have. Today millions of dollars can be moved quickly over cell phones causing an immediate reaction at speeds I’ve never seen before.
Today approximately one-third of deposits in banks nationwide are in excess of the $250,000 FDIC insurance ceiling in the U.S. banking system, and I don’t see the Feds increasing this quarter-million maximum level.
Today I’m sure people are having second thoughts about putting more than $250,000 in a single bank account. This issue can create a problem for the tech sector, but it is one that is endemic to the innovation economy in Silicon Valley.
What has this closure meant for you?
I’m an SVB shareowner who lost a ton of money, as well as my job. That’s my fault.
Our country’s banking system is backed by the good faith and credit of the U.S. Government. As such, I believe government should support people who put their money in bank accounts and not put depositors in the same role as investors.