Although not a week has passed since the start of the Silicon Valley bank crisis, from which the global panic erupted, the game of throwing responsibility for the collapse has begun, according to the American news network “CNN”.
The director is in the eye of the storm
The network stated that the technology sector is pointing fingers at the bank’s CEO, Greg Baker, on the background of his decisions that entered the bank in history, becoming the owner of the second largest banking collapse in the United States.
A bank employee, who asked not to be named, said he was stunned by Baker’s behavior, who publicly acknowledged the extent of the bank’s financial problems, before privately mobilizing the necessary financial support to weather the storm.
This behavior paved the way for the spread of panic, as it was followed by crowds of dealers with the bank to withdraw their money.
The employee who works in asset management commented on the matter: “It is completely foolish.”
He continued, “They were very transparent (meaning the administration), and this is completely opposite to what you usually see in scandals, but their transparency killed them.”
“unsuccessful decisions”
Baker and his management team revealed last Wednesday evening the bank’s desire to raise $2.25 billion to raise its capital to compensate for bond losses and asset sales worth $21 billion, but the matter led to losses estimated at about $1.8 billion.
This loss sparked panic in Silicon Valley, California, where the bank serves emerging technology companies, and on Thursday alone, the plaintiffs withdrew $ 42 billion, which led to the collapse of the bank’s shares by about 60%, according to data from the financial authorities.
At the end of that business day, the bank’s cash flow balance was negative at $958 million, meaning the bank was at risk of bankruptcy and that’s what happened.
“People were shocked at how stupid the CEO was,” said a bank insider.
He added, “You’ve been in business for 40 years, and you’re telling me you can’t secretly raise $2 billion.”
The bankrupt bank’s management did not respond to a request for comment on the matter, but information was received indicating that the CEO had apologized to his employees for what happened.
sad message
He said in the video message to the employees that his “heart is very sad to send this message,” adding, “I cannot imagine what is going through your minds and your questions about your jobs and your future.”
Jeff Sonnenfeld, chief executive of Yale University’s Executive Leadership Program, says he agrees that the bank’s management deserves criticism for being deaf to others and for failing.
“Someone lit a match and the bank shouted ‘fire’, sounding the alarm about transparency and credibility,” Sonnenfeld and Stephen Tien, director of research at the college, added in a joint email.
The two said the announcement of raising $2.25 billion was not necessary, because there was enough capital in place to far exceed regulatory requirements.
They noted that there was no need to disclose at the same time the loss of $1.8 billion.
These two decisions sparked a state of hysteria among depositors who rushed to withdraw their deposits, as it was possible to separate the two matters for a week or two.
The reasons for the collapse
During the past years, the US Federal Reserve pumped huge liquidity into the markets, from which the bank was one of the beneficiaries, and during the boom in emerging companies during the Corona epidemic period, these companies collected huge sums of money from venture investment companies or through offerings and deposited a large part of their money in this bank, which raised the bank’s deposit portfolio. From 60 billion in 2019 to nearly 200 billion dollars in 2022.
During this period, and with the inflation of the deposit portfolio, the bank used about 80 to 90 billion dollars to buy long-term bonds, forming a huge portfolio with average returns that ranged around 1.7%, and since the returns on deposits are almost zero, it gave this bank a good margin to benefit from.
This situation completely changed with the Fed raising interest at a rapid pace at the beginning of 2022, to erode the value of long-term bonds owned by the bank as a result of the decline in bond prices that have an inverse relationship with interest rates, in addition to the startups withdrawing some of their liquidity due to the difficult economic situation and the decline in stock momentum. Technology.
In order to avoid a liquidity crisis, the bank sold some bonds at a loss amounting to 1.8 billion dollars and made a desperate attempt to raise its capital so that the news spread in the market and a state of panic began among investors and customers, followed by hysterical withdrawals, which resulted in the withdrawal of deposits worth 42 billion dollars in one day, which is the 9th of March, which constitutes A quarter of the full value of bank deposits.
And in a withdrawal process that is considered the largest since the global financial crisis, any bank, no matter how large, will not be able to withdraw a quarter of its deposits in one day.
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