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Expert Analysis of the Silicon Valley Bank Situation

Expert Witness: Don Coker
Renowned Worldwide Banking and Financial Expert Witness and former Governmental Banking Regulator and consultant to many Banking Regulators, Don Coker* examines some important nuances of the various financial problems that have arisen, what went wrong, where mistakes were made, and forms of litigation that will likely follow in the 2023 round of troubled bank problems.

Mr. Coker has served in several positions as an interim manager of insolvent financial institutions for governmental banking regulators. In addition he has served as a consultant to over 120 banks, the IRS, eighty of the country's largest law firms, and hundreds of others. His consulting work has included work in sixty-eight countries for clients in forty-four countries. He has authored one banking book and 115 articles, and has been interviewed or quoted in over fifty publications and radio and television stations.

*Disclaimer: Don Coker is an Expert Witness and not a lawyer, and does not offer legal advice.

Recently, when I woke up, turned on the television, and heard about the current Silicon Valley Bank (Total Assets = $211 Billion as of December 31, 2022) situation, I thought that surely I was having a flashback dream about past banking crises I have experienced. The bank's holding company, SVB Financial Group formerly traded on NASDAQ under the ticker symbol SIVB; and I expected more oversight from the stock exchange that was formerly chaired by Bernie Madoff.

Seems that the Fed's repeatedly boosting the discount rate discouraged investors and caused the bank's depositors to withdraw large amounts of funds.
As you would expect, large numbers of depositors withdrawing large amounts of funds creates a problem for any bank.

Many of Silicon Valley Bank's deposit customers were High-Tech and FinTech startups, and it is no secret that these early-stage companies chew up a lot of capital (think "cash" and they refer to using it up as "cash burn") which means that in order to keep going, these companies have to either (1) raise more capital - which is difficult when the Fed is raising interest rates and investors are nervous about the immediate future, and the possibilities of an IPO are very slim, or (2) borrow more - which is difficult if you are already borrowed up to your eyebrows, and not racking up any meaningful earnings, while awaiting the big business payoffs you expect, or (3) withdraw cash you already have on deposit - which is what happened in this case. Reportedly, this is where the bank's problems hit the wall.

Since the Fed had been increasing interest rates and announcing to everyone that they were going to continue doing so for awhile, it should have been obvious to Silicon Valley Bank that this scenario was looming in the future as a real possibility. Financially positioning a financial institution to deal with foreseeable situations such as this one is the responsibility of all financial institutions. That financial responsibility falls on the shoulders of the Chief Risk Officer (or some similar title), which reportedly Silicon Valley Bank did not have in the eight months leading up to these problems. (Note: If the CRO is hit by a bus, then the responsibility usually defaults to the Chief Financial Officer. Where was he or she?)

Likewise, where was the Bank's Board of Directors - including ten outsiders - while this was going on?

SVB Financial Group's December 31, 2022, SEC Form 10-K was completed by KPMG, LLP, who simply stated under the "Unresolved Staff Comments" section: "None."

Really? A blind Risk Manager, Chief Financial Officer, Chief Executive Officer, Board of Directors Member, or Auditor should have been able to see this coming if she or he had (1) A television, (2) A Radio, or (3) A Braille Newspaper. What do they think their job is?

Keep in mind that NASDAQ was supposed to be keeping an eye on Silicon Valley Bank's financials as well.

The U.S. Securities & Exchange Commission swung into action shortly after they read about this situation in the newspapers.

Presumably, the governmental banking regulators saw everything that the Auditors saw, yet waited until it was too late to pull the plug. (Interestingly, it was the California State Banking Regulators that made the call.)

Every banking regulator or auditor reviewing the operations at Silicon Valley Bank should have had a small cardiac event when they asked who at this $200+ Billion bank was watching risk management, matching of asset and liability risks and maturities, and so forth, and learned that no one was.

The banking regulators or auditors response should have been: "Well, immediately get someone that knows what they are doing into that job."

Lots of questions to be asked, and I can't wait to hear the answers.

Moving on the the Deposit Insurance issue, as a former high-level banking manager and high-level banking regulator, I have always found it interesting (and annoying) that non-bank professionals are surprised that the Federal Deposit INSURANCE Corporation is an insurance company. [Interesting side note: A public broadcasting reporter interviewing me recently stated that bank robbery was a victimless crime since all of a bank's deposits were insured by the FDIC. - Poor girl.]

Now, flashback to that basic and drastically oversimplified explanation that you were given in high-school or middle-school (if you were lucky like I was) of how insurance works, and that went something like this: Everyone is not going to have a car wreck every day, so if each insured person makes a little contribution monthly or whatever, then that pool of money can be used to make whole the few insureds that do have a wreck.

Apparently, our current federal banking regulators played hooky the day of their explanation because they are now saying that the FDIC will cover ALL of the depositors' funds even though the maximum insured deposit amount is $250,000.

Then the FDIC added that future dividend payments may be made to uninsured depositors.

This makes no sense. Dividends are paid out of net income (basically revenues less expenses), and there is no net income here available to pay these phantom dividends.

Furthermore, dividends are payable to stockholders and not to depositors.

In a previous banking meltdown, the banking regulators hired me to manage some insolvent banks that were essentially waiting in line to be liquidated whenever the FDIC had the funds available to resolve them.

My instructions, which I passed along to the employees I was managing, were to examine our accounts, determine any deposit amounts that were above the insurance limit, contact the account holders and tell them to resolve the situation, and if they failed to do so in a timely manner, cut a check in the amount of the uninsured portion of the account's balance, and send the check to the account holder. We had numerous instances where we had to send those checks.

When you take into consideration the extremely large uninsured amounts at Silicon Valley Bank, simply making all account holders whole creates a financial disaster for the FDIC and the banking system as a whole.

The U.S. Treasury Secretary and former Federal Reserve Chairwoman Janet Yellen stated that the decision to make all of Silicon Valley Bank's account holders whole was based on the fact that it is a Systemically Important Financial Institution. Well la-de-dah! She did not mention anything about the fact that uninsured depositors at previously failed banks did not get this kid-glove treatment. She also was completely silent on the political leanings of the bulk of the Bank's depositors. Likewise, she apparently had no problem saying that the uninsured deposits would be paid for by charges (meaning higher FDIC insurance premiums) to other banks! Two factors here: How is it fair for every bank that did not do what Silicon Valley Bank did now has to pay for what Silicon Valley Bank did? Also, it is a certainty that these innocent banks will have to pass along these extra FDIC insurance premium fees to their customers who did not choose to take the risks of maintaining uninsured deposits at Silicon Valley Bank.

This aspect of this mess has to be rethought.

Conclusion: The resolution of these problems is going to be quite different from past failed bank resolutions. Stay tuned.

© 2023 by Don Coker. Serving clients worldwide from his Atlanta metro area office.

ABOUT THE AUTHOR: Banking, Financial, Real Estate, Embezzlement, Business & IP Valuation, Wire Transfer, Trust, Mortgage Banking Expert Witness Don Coker – Serving Clients Nation/Worldwide from metro Atlanta, Georgia.
734 cases, 188 testimonies, plaintiffs & defendants. All areas of banking, mortgages, finance, real estate, investments, trusts, estates, IP, insurance, damages, embezzlement, credit cards, payments, funds & wire transfers, SWIFT.

Listed in expert databases recommended by DRI, AAJ members.

Clients: individuals, 80 of the country's top 400 law firms, 121 banks, 70 insurance cos., 90+ trusts & estates, government clients incl. IRS, FDIC, Federal Reserve, Agency for Int'l Development, United Nations, World Bank, Int'l Monetary Fund, Int'l Accounting Standards Board Foundation, Centers for Disease Control & Prevention, et al. Clients in 44 countries, work in 68 countries.

Previous officer at Citicorp and banks now JPMorgan Chase, Bank of America, BBVA & experience as a high-level governmental bank regulator.

BA, postgrad., executive ed.: Alabama, Houston, SMU, Spring Hill, Harvard Business School.

1 book, 114 articles, quoted over 150+ times by 50+ media news sources.

Copyright Don Coker

Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.

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