New Questions About Goldman Sachs's Work With Silicon Valley Bank

Goldman Sachs was an advisor to Silicon Valley Bank and attempted to rescue the bank by arranging a capital raise in the last minute. The Wall Street giant played an important role in the bank’s final days and is expected to receive a large fee for this. It purchased a lot of bank debt, which ultimately led to concern about the bank’s viability.

According to people familiar with the matter who asked anonymity as the information is confidential, Goldman could earn around $100 million in exchange for $21.4 billion in debt purchased from Silicon Valley Bank. The failed lender had a loss of $1.8billion and the bank was unable to pay it back. This number is still in flux.

Here's why: Banks often buy bonds like Goldman did. They usually acquire the debt at a discount relative to the price they think it can sell it. This discount is a compensation for the bank's risk by placing the debt on its balance sheets. The bank will then try to sell the debt at the highest price possible. The difference between what it paid for the debt and what it earns will determine its reward.

One person said that Goldman hasn't yet sold the debt. It is not clear how much. Drew Pascarella, Cornell University's senior lecturer in finance, stated that Goldman likely negotiated a steep discount due to the volatility of the debt market over the past few weeks. In recent days, the U.S. government's debt has seen a significant increase in value as investors seek the relative safety of bonds to protect their money amid the turmoil following the collapse of Silicon Valley Bank.

Bankers and legal experts agree that Goldman's deal to Silicon Valley Bank is not irregular. It will be scrutinized due to the rapid fall of Silicon Valley Bank and the extraordinary steps taken by the U.S. government to stop the losses, as well as the dual roles Goldman played in the bank's demise.

After Moody's had privately warned Silicon Valley Bank about a possible downgrade of its bonds' rating, the bank called Goldman to get advice on how it could shore up its books. Goldman purchased the distressed debt and the bank's advisers began to seek capital markets funding. However, Silicon Valley Bank's public disclosure of $1.8 billion in losses it had incurred from the sale led to a stock sale that almost made the sale unthinkable.

Image

John Coffee, a Columbia Law School professor of corporate governance, said that the irony in this story is that the disclosure about the bond loss scared investors more than when they didn't yet see equity coming.

Goldman was one example of an investment firm that had multiple roles. According to people familiar with the matter, Silicon Valley Bank offered Silicon Valley Bank the chance to hire an additional adviser to help with the bond deal. However, the lender declined.

Multiple roles are often played by banks. They make sure to clearly state that they do so while keeping the lines of communication open between departments. However, such deals may be subject to legal scrutiny. Rural Metro was one example. Rural Metro was being sold by Royal Bank of Canada and needed financing.

Eric Talley, Columbia Law School professor of corporate law, stated that in some cases the investment bank was held responsible for misleading clients while wearing one hat to generate business. "Here however, it seems that the capital raise and bond sale were just two barrels of a bigger strategy.

The move is open to political scrutiny, but there's nothing stopping it. The question of whether Silicon Valley Bank executives will be prevented from receiving their payments by the federal government is a point of contention.

Senator Elizabeth Warren (Democrat of Massachusetts) and others demand a clawback for the bonuses and profits made selling shares in the bank's stock in the weeks prior to its collapse. Recently, the Justice Department launched a pilot program to claw back incentives. It is currently investigating the collapse. The Biden administration already faces criticism for what some call a bailout.