- SVB Financial deposit outflows outpacing sale process
- SVB Financial's attempts to raise capital have failed
- SVB Financial's attempts to sell itself in doubt
WHEN: Today, Friday, March 10, 2023
WHERE: CNBC's "Squawk on the Street
Following is the unofficial transcript of breaking news about Silicon Valley Bank from CNBC's David Faber on "Squawk on the Street" (M-F, 9AM-12PM ET) today, Friday, March 10th. Following are links to video on CNBC.com: https://www.cnbc.com/video/2023/03/10/silicon-valley-banks-attempts-to-raise-capital-have-failed-sources-tell-cnbc.html and https://www.cnbc.com/video/2023/03/10/silicon-valley-bank-financial-in-talks-to-sell-itself-sources-tell-cnbc.html.
All references must be sourced to CNBC.
PART I
DAVID FABER: Good morning, guys. Yeah, it's the typical day off, we're gonna get news. We're obviously keeping a close eye, I know you guys are on Silicon Valley Bank. You know a few things to share here at this point. As the market already seems to be well aware, though, I don't believe the company has formally announced and that may be why it is halted, news pending. That capital raise that Goldman Sachs had embarked on is a fail. It's not going to happen. There are plenty of reasons people can point to for why. They certainly didn't seem to time it particularly well in terms of crystallizing a loss and then going out to the market as opposed to actually having a capital raise when they knew they were going to take that loss in that bond portfolio. But beyond that, I can also tell you that separately the bank, Silicon Valley Bank, has hired advisors, not Goldman Sachs, has hired advisors to seek a sale. Again, not unexpected, right? You would expect given the inability to raise capital and the fact that deposits are fleeing this thing at an incredibly rapid rate that they then would go to say, okay, can we get sold? And I am told that there are large financial institutions who've looked at this bank for some time, who are at least considering taking a look. Doesn't mean that anything will happen? Absolutely not. In a situation like this, as you guys can well remember from the financial crisis, deposits can move very, very quickly. So by the end of the day, who knows where things stand, but I can tell you that there is a separate advisor from Goldman that has been brought in that is taking inquiries that is reaching out that large financial institutions, large financial institutions are at least taking a look at Silicon Valley Bank because, Jim as you know, and you were just discussing I mean it is a franchise that is somewhat unique in negatives, perhaps in some way but also in positives, its connection to high net worth, the VC community. So it is something that a number of banks have looked at in the past. If you could get in there quickly, STEM the the outflow of deposits, you might actually be able to pick something up of great value. So that's at least what I'm hearing right now. And as we all know, this is a very dynamic situation.
JIM CRAMER: Absolutely. David, this is a formerly pristine enterprise in the sense that what they did was they had so much of whatever came public, that they would be the envy of most banks. But David, you know, the window being closed for IPOs is what's causing these guys to have a lot of pain, not recklessness. I also didn't think they were that reckless in the way they invested. But because the duration risk and the Fed's moving such alacrity that backfired. So these are this is not a reckless bank, David, it's just that, you know, JPMorgan would never lend against those securities.
FABER: Right. I mean, no, listen. You have all these venture capital companies, or I should say, startups, whatever you want to call them, Jim, right, that had an expectation of going public at some point, that now we're drawing down on the various deposits, in terms of that they had at the bank. So you had that going on. And as you say, during the period of '20 and '21, that we know well, there was so much incoming that they had to go out but they couldn't lend against it. And so they just went and bought bonds and obviously yields that are far lower than we have now. You're right. This was not necessarily bad actors. It was just bad timing to a certain extent. But I also do wonder, Jim, you know, I can take you back to your golden days but what happened here? I mean there's a way to do this. There's a way to crystallize a loss at this because they didn't need to announce it when they did. They, they could have set up the capital raise so that they could put a press release out that says, alright, we sold this bond portfolio of 21 billion, we're still 300 basis points above our minimum regulatory reserve cap. Reserves, excuse me, and we've raised another 2 billion just just to be safe, and I think the market would have been fine. They really—
CRAMER: I agree.
FABER: Screwed it up in terms of how they went about announcing this.
CRAMER: They totally did. I mean, when you think about it, how many times did Powell say longer, higher? So, David I mean, this whole period what they should have been doing is trying to figure out how do they get out of a three year piece of paper, four year piece of paper and doing it at the same time saying, listen, listen, we're not selling, you know, even the worst corporates. We're selling some of the greatest treasuries so I agree with you. I don't understand why the, what, did a bank examiner come in David and say we don't like the way this looks?
FABER: Yeah, I don't know. But I mean, you know, if you're going to take a $1.8 billion loss, but still be well above your minimums in terms of your reserve, I don't understand. You could have sold stock at, you know, at below book, it just didn't go well for them. And now they find themselves in this terrible position where obviously you tell me, Jim, I mean, you know, the story how many deposits are gonna get pulled today? What's this thing gonna look like at the end of the day?
CRAMER: Well, you've got, you have VCs telling people to pull the deposits for heaven's sake, so a lot anything over 250 but David, they had Bill Ford, they had GA for 500.
FABER: Yes, they did.
CRAMER: Why didn't they get two or three other Bill Fords?
FABER: I know they did, but they priced it too high and then they gave it too long. They could have set it up for when they actually were ready to announce the loss on the bond portfolio, which should have all been one thing. That said, Jim, I, you know, what do you see as the, is this systemic risk here from this thing. There are obviously a number of other banks that we know traded down significantly yesterday, some that will today. But what do you see in terms of reverberations given there was a unique franchise here that's not necessarily replicated by many others.
CRAMER: Well, most do not have both sides' problems. Most do not have situations where you leant against securities that may never be securities. That was an aggressive statute, they always had no bank, I think of any size wanted to do that kind of concentration. Maybe they have some I really haven't found many. And then the other side, the duration risk, that's real. But the way to solve the duration risk is for Jay Powell to say listen, we've got to go a little slower and we seem to have the leeway because the the wages haven't gotten that much hotter. But David, the duration risk is the real worry for the regional banks, because they all they're all caught by how fast the Fed moved.
FABER: Right. And so we should just point out on paper, many of them have losses on their bond portfolios that are obviously that's the key here. But most of them are not going to have a run on their deposits so they can just hold these things for the duration and lose them, you know.
PART II
CARL QUINTANILLA: Watching obviously SVB, one of the huge stories of the day, we talked to David Faber at the top of the hour who is back. David, is there more?
FABER: Yeah, guys, thanks. I, you know, I just wanted to come back because obviously we did share with with our viewers the headlines that we had in terms of potential for the company selling itself or trying to but as we pointed out at the time, these things can move so quickly. And I just wanted to share that, you know, what I'm hearing is that in fact, they are moving very quickly in terms of deposits moving out, making it very or more difficult for any buyers to really assess and consider a purchase of the of the bank. Perhaps a bit too early to say, but nonetheless, it would already appear that those attempts to potentially sell this company and again, there were a lot of interested buyers based on the franchise but the attempts to potentially sell it certainly seem to be running into the to the reality of the moment which is it's hard to buy something when all the deposits are fleeing. And so, you know, again, we we have to I think the market has to prepare and prepare for the possibility that that there will not be a sale and then you can leave it to your own imagination as to what that means. We have to assume the government regulators are already already in there as well. So it continues to develop, but I, you know, we certainly share the news as we get it, and there's no doubt it's factual that there are buyers that were looking and being talked to but nonetheless, Jim, as you well know, these situations move perhaps too quickly for any buyer to really be able to get something done in the time you need to.
PART III
FABER: Morning Carl. Good morning, Sara. Yeah, I mean, this is a situation obviously the market is focused on this morning for obvious reasons. We can go back and sort of talk about it, you know, from a macro perspective as well, Sara, it's interesting, given the pressure that SVB has been under only recently as a result of deposits leaving, in part because so many of the clients that they have, in fact, are emerging companies that thought they might go public that have needs for the deposits they had on hand there, but also overall in the banking system, we've seen deposits moving out in part because of the opportunity for higher yield even in the treasury markets, a one year you can get 5%. And so you have this duration risk starting to show itself because of course the assets that are offsetting those deposits may have been put on the books some time ago before rates moved up appreciably and therefore, bond portfolios are underwater. None of that means much unless you have deposits flowing out that has been the case at SVB. And that brings us to the current moment here. We reported this morning initially, of course, that after a failed capital raise after an attempt by the company to raise as much as $2 billion, Goldman Sachs was the lead on that, they failed to do it. They really, as we pointed out earlier, sort of seemed to have timed it very poorly in terms of crystallizing a loss in their bond portfolio and not already having the capital raise in place. They then moved on, as you might expect, and I reported this morning to potential sale of the entire bank. There are large financial institutions that have been interested in SVB in the past seeing this as perhaps an opportunity to see the real franchise here in Silicon Valley. All the relationships with net, high net worth clients and with these emerging companies, of course, that could become very important. However, as they reported later in the nine o'clock, these things move too quickly, perhaps to be able to negotiate any sort of a deal in the time you need to take to negotiate a takeover. And when I say things, I mean deposits. They're moving out of this bank at a rapid clip and so it's becoming very much unclear that the ability of Silicon Valley Bank to sell itself and that may set up a course something else over the weekend. We'll have to wait and see but we'll see if the stock opens. But everything I hear indicates that deposits are flowing out very quickly for many of those companies of course that have balances well over $250,000 that are saying hey, let's get our money out of this bank. We'll ask questions later.
SARA EISEN: David, we're looking at the spillover effect which which is broad across the banking system, especially in some of these regional banks, First Republic down more than 50% a moment ago, Pac West is down more than 20%. You know, we're trying to figure out how unique Silicon Valley Bank was. It did have this unique singular focus on venture capital lending and we're going to see obviously an impact on that. As far as the the broader issue though of the rapid change in interest rates and what's been happening with deposits, I mean a lot of regional banks could be at risk here. What are you hearing?
FABER: Well, there is you know, that duration risk is real in the case of SVB I think you have what a $21 billion bond portfolio that they sold, generating that $1.8 billion dollar loss because of course they bought those bonds when they had a huge inflow of deposits and let's call it 2020, 2021 timeframe, and there are many other banks that are also facing potential deposit outflows in part because they're not paying high enough rates because people see yields other places. And therefore sitting on losses that you never have to crystallize because you don't have to worry necessarily about you know, deposits really leaving and so yeah, there's duration risk there Sara at some of these regional banks, but again, a lot of it depends on whether you actually have to take the loss right. It's not something that they report their earnings. They'll tell you, you can look and see that their bond portfolio may be underwater, given the big rise in rates, but right now a lot of investors are simply selling and will ask questions later, particularly for some of these very focused banks, like Republic even though I think it's an incredibly well-respected bank that has a very strong loan portfolio. Nonetheless, we are seeing a lot of investors sort of again making their choices here in terms of where they really want to be and they don't want to be in these kinds of names given that potential duration risk.
EISEN: Yeah, epic contraction, I think in bank deposits, given what's happening, they've been slow to raise deposit rates, as well, which is part of the story, David, and then there's the big banks, which look the financials are underperforming today, but they're holding up better and all the analysts that cover them are going out of their way this morning to say the big banks are well capitalized. They're in very good shape. There's not going to be financial contagion here. Goldman Sachs put out a note this morning saying use the weakness to buy some of these big banks.
FABER: Yeah, and that may be true. Listen, many of them may also be sitting on what our paper losses, you know, in bond portfolios that they obviously have. But but it would seem hard to imagine given the capital that they have on hand that there's any real systemic risk here, and certainly not from SVB. Clearly we're seeing it play out in the equity market, but one would imagine this can be spent pretty quickly. I know that the government has already obviously in there at SVB. You have to imagine looking at what they can do if something needs to be done in terms of preserving deposits across the board transferring those deposits and assets to another institution. We'll see what happens. We'll see perhaps if they're successful in some way and getting somebody to buy them, although, as I've said that seems increasingly unlikely given the rapid departure of deposits. But as for the big banks, you know, one of them Sara may be there on Sunday night, right, taking on some of these assets and deposits and relationships, forced by the government perhaps to do so kind of reminiscent Carl of a period we saw almost 15 years ago exactly now with with when Bear Stearns went down.