Juice the Profits

If you thought that I was being too cynical when I said in my previous post that the decision makers at Silicon Valley Bank were not “well-intentioned naïfs,” Daniel Gilbert, Todd C. Frankel, and Joseph Menn have an update:

Flush with cash from a booming tech industry, Silicon Valley Bank executives embarked on a strategy in 2020 to juice profits that quickly triggered an internal alarm.

In buying longer-term investments that paid more interest, SVB had fallen out of compliance with a key risk metric. An internal model showed that higher interest rates could have a devastating impact on the bank’s future earnings, according to two former employees familiar with the modeling who spoke on the condition of anonymity to describe confidential deliberations.

Instead of heeding that warning — and over the concerns of some staffers — SVB executives simply changed the model’s assumptions, according to the former employees and securities filings. The tweaks, which have not been previously reported, initially predicted that rising interest rates would have minimal impact.

The episode shows that executives knew early on that higher interest rates could jeopardize the bank’s future earnings. Instead of shifting course to mitigate that risk, they doubled down on a strategy to deliver near-term profits, displaying an appetite for risk that set the stage for SVB’s stunning meltdown.