Head in the Sand Management – 
the SVB Case

I listened to a financial briefing for a tech company in which I am an investor several weeks ago. I asked why there was no consideration of the anticipated recession, no plans to conserve cash, and no review of essential staffing requirements.

Silicon Valley Bank, SVB, was seized by bank regulators because its capitalization fell below the required minimums. No complex derivative securities that no one understood were involved as happened in 2008. SVB used its cash, including deposits, to buy bonds at low-interest rates. When the Fed raised interest rates, the value of the bonds fell – a lot. SVB did not hedge against the interest rate risk or diversify its investment portfolio as did other banks.

Everyone knew interest rates would rise. When interest rates go up, the value of fixed-income securities goes down. Everything that happened to drive SVB out of business was completely predictable.

Scott McGurl is Grant Thornton’s head of Strategy Services. Scott recently posted a note on leadership during a challenging period such as a recession. He started by reviewing the all too familiar and unproductive leadership styles:

- Slashers – unfocused cost-cutting that limits future opportunities
- Hedgers – investing outside the core business hoping to find something that works
- Ostriches – head in the sand hoping to ride it out - slow to respond

Surviving the recession - the challenge facing you - is paramount. But Scott also makes the point that challenges create opportunity. You want to strengthen your core business and be prepared to take advantage of new opportunities created by the crisis. The full article is HERE.

Can you find buying opportunities while values are down? The best time to buy real estate is when interest rates are high. A UK firm bought SVB’s UK operations for £1! Can you bring on technology or talent that is usually hard to find?

Yes, there is some inside story to the SVB collapse. But I must ask what the senior leadership of the bank and its board were thinking. Is “ostrich with head in the sand” the simple answer?

Have you carefully thought through what a recession or further interest rate rises could mean for the financing or operations of your company or nonprofit? Do you have access to cash and other financing you might need? If you must reduce expenses, what will you cut while protecting the core business? Could there be special opportunities to strengthen your position or gain market share?
Post your comments on this blog below. Enrich our community’s discussion of these topics by sharing your experiences and your point of view.

Red Window

I cross-country ski in Vermont during the winter. White snow is winter’s color. But special scenes pop from the white. This red barn window calls out and reminds us of work in the barn during the summer.

4 comments on “Head in the Sand Management – the SVB Case”

  1. This "crisis" is unique because there were NO complex or new instruments involved. It was old fashion management failure, not matching asset and liability maturities, and totally inadequate hedging against interest rate changes.
    Lessons? Old fashioned management diligence on the basics is just as critical as a brilliant strategy.

  2. Rick, great note. Thanks for sharing.

    My biggest surprise - and lesson - in all of this was that many of my CEO clients (I'm a CEO Coach) didn't use simple treasury management techniques to protect their uninsured assets.

    Thank goodness the Fed came through on this one!

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