Term Sheet — March 14, 2023

　　It's Not Venture Capitalists' Fault

　　"I spent that weekend on the phone with Ohio small businesses and banks and credit unions,” he said, giving introductory comments as the first speaker of yesterday's more than two-hour hearing. “Ohio small business owners simply wanted to make payroll. They didn’t want to see years of hard work go down the drain because of venture capitalists panicking on Twitter, 2,000 miles away.”

　　There's been a lot of blame cast in the last several weeks over who did what and when. We've already seen lawsuits, terminations, a high-profile bankruptcy, and a slew of takeovers. Venture capitalists have become an easy villain for politicians to point to—rich tech bros with their private jets and self-aggrandizing rocket ship emojis are an easy target, so easy that plenty of venture capitalists and founders themselves are doing their fair share of finger-pointing at one another, too.

　　For all the highly-opinionated people ranting over how the panic started, and who is responsible for taking their money out first, testimony made by officials from the Federal Reserve, FDIC, and Treasury served as a welcome reminder that there's a more important matter: Why there was widespread fear and panic in the first place.

　　We've been reporting on Silicon Valley Bank’s highly problematic balance sheet, its lack of a chief risk officer (which Fortune was the first news outlet to report), and how, even before its financial disclosure sparked the bank run, SVB was arguably close to insolvent, and rapidly heading for failure. Early findings from federal investigations paint a clear picture of what the bank itself was responsible for, and testimony suggested that current regulations allowed Silicon Valley Bank to continue to operate irresponsibly for nearly two years.

　　"This is a textbook case of bank mismanagement,” testified Michael Barr, vice chair for supervision of the board of governors of the Federal Reserve System. He noted that interest rate risk and liquidity risk are the “bread and butter of banking issues” and that SVB was made “quite aware of those issues.”

　　When Sen. Elizabeth Warren (D-Mass.), who championed the original Dodd-Frank Act after the 2008 financial crisis, pointedly asked the three testifying officials whether more regulation was needed to monitor the banking sector, they all said yes.

　　If you don’t want to listen to the whole hearing yourself (I don’t blame you), here's my highlight reel. Speakers were Barr; FDIC Chairman Martin Gruenberg; and Nellie Liang, under secretary for domestic finance for the U.S. Department of the Treasury.

　　Barr said that Silicon Valley Bank’s management had been rated a CAMELS 3, meaning that it was “not well managed.” At the holding company level, referring to SVB Financial, it was rated deficient, which is “also clearly not well managed.”Barr said SVB had alerted the Federal Reserve the morning of Friday, March 10, that there was $100 billion of withdrawal requests in the queue for that day—and they didn’t have the collateral to withstand that. The California financial regulator shut the bank down for this reason. (If you recall, that’s on top of the $42 billion withdrawn on Thursday.)Barr said the Federal Reserve is doing a self-assessment, but will also welcome independent reviews of their actions.Gruenberg said that there were two bids for SVB on Sunday right after the collapse. One bank bidder hadn’t received approval from their board, so it didn’t qualify. The other would have cost the FDIC more than a liquidation. “We did not have an acceptable bid,” he said.Barr said that SVB had been told by the San Francisco Federal Reserve about the risks to their business all the way back in November 2021, and highlighted how investors were talking about problems with interest rate and liquidity risks publicly, and the bank still “didn’t take the action necessary.”When asked whether the FDIC would claw back compensation from senior banking executives, Gruenberg said that the FDIC is investigating the conduct of the members of the board and management and that the agency can, depending on the findings, impose civil money penalties, restitution, and bar individuals from the business of banking. The FDIC, under the Federal Deposit Insurance Act, does not have explicit authority to clawback compensation, but “we can get to some of that with our other authorities,” Gruenberg said.There were repeated questions from senators over whether the FDIC took too long or mismanaged the sale process. Gruenberg defended the FDIC’s actions and said the agency had acted quickly: “It was really a determination that we made to try to set up two bridge institutions to manage for a short period of time these two failed banks, and then to organize…an open bidding process for both institutions, which we ultimately were able to implement successfully,” he said.Barr said the Fed Reserve will need to go through a formal rulemaking process, but he anticipates the agency needs to “strengthen capital and liquidity standards for firms over $100 billion.”When Warren asked Gruenberg if he would roll back changes Jelena McWilliams, who was appointed FDIC chair during the Trump presidency, made to FDIC regulations, Gruenberg, who had voted against those measures, said it was “certainly” appropriate for the FDIC to go back and review in light of the recent episode and consider changes. “My views haven’t changed,” he said.Sen. Jon Tester (D-Mont.) pressed questions about whether the San Francisco Fed threatened to fine SVB when the bank didn’t address its concerns and why the Fed regulators did not “drop the hammer” on the bank. “I agree that the risks were there, that the regulators were pointing them out, and the bank didn’t take action,” Barr said. “It’s ultimately in the first instance the bank management’s responsibility to fix these problems, and they failed to do it. Where we didn’t take enough action, and if the Federal Reserve supervisors didn’t take enough action, we’re going to be talking about that in our review and we expect to be held accountable for it.”There will be a slew of individuals in the hot seat as more information surfaces. Some of that will probably happen at 10 a.m. ET today, when the House Financial Services Committee grills the same officials, which you can attend here. And more to come when the Federal Reserve publishes its formal report on what happened on May 1.

　　Extra credit reading…With the Silicon Valley Bank implosion, it’s been easy to lose track of all the other, also-important-and-ongoing threads in the private markets, whether it be TikTok’s CEO testifying before Congress, Binance being sued by the CFTC, or Alibaba breaking up into six separate companies. Here are five longer reads that you may have missed during the mayhem. They are well worth your time.

　　How Binance really operates: The world’s largest crypto exchange boasts vast profits, hefty influencer payouts, and a ticking time bomb on its balance sheet — Shawn Tully, FortuneYou Are Not a Parrot — Elizabeth Weil, New York MagazineVenture Capital’s 25 Favorite Cafes — Annie Goldsmith, The InformationA is for abuse: Two Harvard Grads saw big profits in African education. Children paid the price — Neha Wadekar and Ryan Grim, The InterceptHow Cigna saves millions by having its doctors reject claims without reading them — Patrick Rucker, Maya Miller and David Armstrong, ProPublicaSee you tomorrow,

　　Jessica Mathews

　　Twitter: @jessicakmathews

　　Email: [email protected]

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　　Jackson Fordyce curated the deals section of today’s newsletter.