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

As an adviser to Silicon Valley Bank, Goldman Sachs tried to pull off a last-minute capital raise last week to save the bank from collapse. But the Wall Street giant also had another role in the bank’s final days, for which it is expected to collect a huge fee: It bought a cache of the bank’s debt in a deal that ultimately led to concerns about the bank’s viability.

In exchange for buying $21.4 billion of debt from Silicon Valley Bank — which the failed lender booked at a loss of $1.8 billion — Goldman could make around $100 million, said people familiar with the matter, who requested anonymity because the information was confidential. That total remained in flux.

Here’s why: When buying bonds the way Goldman did, a bank usually acquires the debt at a discount to what it thinks it can sell it for. That discount is effectively a form of compensation for the risk the bank takes by putting the debt on its balance sheet. The bank then tries to sell the debt for as much as it can, and the difference between what it paid and what it brings in will determine the value of its reward.

Goldman has not yet finished selling that debt, one of the people said, so it is unclear how much it will make. But given the volatility of the debt markets in the past several weeks, Goldman probably negotiated itself a relatively steep discount, said Drew Pascarella, a senior lecturer of finance at Cornell University. The value of U.S. government debt has jumped in recent days, as investors have sought the relative safety of bonds as a place to park their cash amid the turmoil that followed Silicon Valley Bank’s collapse.

Legal experts and bankers say Goldman’s deal with Silicon Valley Bank is far from irregular. But it will almost certainly invite scrutiny given the speed at which Silicon Valley Bank fell, the extraordinary measures the U.S. government took to stem the losses and the dual roles that Goldman played for the bank in that fateful week.

In early March, after Moody’s privately warned Silicon Valley Bank that it faced a possible downgrade in the rating of its bonds, the bank called on Goldman for advice to help it shore up its books. Goldman bought the distressed debt, and its advisers set out to raise money in the capital markets. But when Silicon Valley Bank publicly disclosed $1.8 billion in losses that it had booked from the sale, that helped set off a stock sell-off that all but made the share sale impossible.

“The irony here is the disclosure of the loss on the bonds scared investors even more when they did not yet see new equity coming,” said John Coffee, a corporate governance professor at Columbia Law School.

Investment firms often wear multiple hats, as Goldman did on this deal. In this case, it offered Silicon Valley Bank the opportunity to hire another adviser to work on the bond deal, but the lender declined, the people familiar with the matter said.

Banks that play multiple roles for their clients take pains to say they are doing so while maintaining walls between teams. But such deals can invite legal scrutiny, as was the case when Royal Bank of Canada sought to provide financing to an acquirer of the company it was selling, Rural Metro.

“In some cases, the investment bank has been held liable for misadvising the client while wearing one hat in order to drum up business with the second hat,” said Eric Talley, a professor of corporate law at Columbia Law School. “Here, however, it appears that the bond sale and the capital raise were two barrels of a larger strategy.”

There’s nothing, however, stopping the move from inviting political scrutiny. One point of tension is whether the federal government will prevent Silicon Valley Bank’s executives from getting their payouts.

Senator Elizabeth Warren, Democrat of Massachusetts, and others are demanding a clawback of the executives’ bonuses and the profits they made from selling shares in the bank in the weeks before its failure. The Justice Department, which is investigating the collapse, recently rolled out a pilot program for clawing back incentives. And the Biden administration is already facing pushback for what some are calling a bailout.

It’s not clear whether Goldman’s fee is directly relevant to any of these high-level discussions, though they will surely pay attention to and raise debate over Goldman’s deal.

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