What Did Silicon Valley Bank Do Wrong?

What Did Silicon Valley Bank Do Wrong?

Dear Friends and Investors of Go Fish Capital,

I had my first mentor when I was just a teenager (at 18 years old), working as a junior financial advisor at Morgan Stanley Dean Witter. His name was Jay Gilfus, a Cornell-educated financial advisor who always made it a point to take me under his wing and teach me whenever he had the chance. I remember being concerned about the investment portfolios of our team’s clients because interest rates were going up, and the stock market started to fall considerably. And I’ll never forget what he taught me…he said, “Every time interest rates go up, our clients make more money.” He went on to explain to me that it’s just a cyclical change in the market, and it’s happened many times in the past.


“The Proper Asset Allocation Rule”

He then started showing me that when the Fed starts to signal (way ahead of time as they always do) that they’re going to start raising interest rates, "that" is the time to shift investment portfolio asset classes from a 70/30 weight in stocks/bonds into an 80/20 weight of bonds/stocks – particularly selling off “small-cap growth” stocks in favor of “large-cap value” and shifting 80% of the portfolio into an asset class called “floating rate bonds” – which are bonds or bond funds that offer return rates that are tied to interest rates like LIBOR in the UK or the Federal Funds Rate here in the US. That’s how every time the Fed raised rates, the holders of those bonds make more money. Diversification to us meant that we never put more than 5% of a portfolio into the same exact asset class, - but if we saw interest rate hikes coming, we would always shift 80% of the portfolio into (large-cap or municipal) floating-rate bonds.

“Proper Asset Allocation For Lenders”

Above is for individual people’s portfolios; lenders like Go Fish Capital and Silicon Valley Bank need to be even more conservative, with most of our assets (80%+) in either guaranteed & insured loans or guaranteed & insured SPVs (Special Purpose Vehicles – which can (among many investments) offer guaranteed & insured debt investments) while having only a small securities portfolio (< 20%) in bonds or bond funds – while still honoring the strategy that my first mentor taught me, which is to shift a securities portfolio into floating-rate bonds at the first hint of rising interest rates.

Mistake #1: Silicon Valley Bank not only violated this critical rule by allocating only 44% of its roughly $200B of deposits into loans (according to Forbes)…

Mistake #2: …but when they realized that they could not make as many loans as they needed to, they didn’t allocate the needed remaining amount into guaranteed & insured SPVs (of loan portfolios of “other” lenders like Go Fish Capital)…

Mistake #3: …instead, they let 56% of their assets become allocated into “fixed-rate bonds” – many with maturity terms of 10 years…

Mistake #4: …and when the Fed started signaling that they were going to raise interest rates, SVB just sat there instead of selling off their fixed-rate bonds (or fixed-rate bond funds) at a time when they have not yet lost value from rising interest rates.

Mistake #5: …instead they not only waited until interest rates rose to 4.5% (and then) waited until the Fed signaled that they were going to “continue” to raise rates at least another .5%, they waited until they were “downgraded by Moody’s” before they finally sold off 18% of their securities portfolio (about 10% of their overall assets) - which by this time provided them with a loss yielding approximately -10% (or -$1.8B) on those investments – a loss equal to 2x their entire $913M Net Income of 2020 and greater than their entire $1.5B Net Income of 2022.

After that loss became public, VCs like Peter Thiel quickly & strongly advised the companies in their own investment portfolio to withdraw their money from SVB, setting off a good old-fashioned bank run.


SVB’s History of Failing To Diversify & Properly Allocate Their Assets

You would think that they learned their lesson about the importance of diversification & proper allocation of their assets after the dot-com bubble burst in 2000, when most of SVB's clients were (just like now) all in the same sector (the tech sector) - and at that time those clients became unable to repay their loans, resulting in significant losses for SVB. According to the bank's annual report from 2001, SVB's non-performing assets (loans that were past due or in default) increased by $254 million that year, representing a significant portion of the bank's total loan portfolio. SVB’s Net Income plummeted to $88.2 million, compared to $159.1 million in the prior year, a decrease of 44.6%. SVB's stock price also suffered during the dot-com bust, dropping from a high of around $90 per share in early 2000 to a low of around $5 per share in late 2002. Yet, they continued to put “all their eggs into one basket.”


An Opportunity For Go Fish Capital

The failure of SVB opens up over $150 Billion of lending opportunities here in Silicon Valley that will last for “decades” past the recovery of this financial crisis, and Go Fish Capital is poised to capitalize on this new opportunity. As soon as we obtain wholesale debt capital from institutional investors on the Finitive platform we can create a lending product that tailors to the VC backed startup market which resembles a Revenue Advance – but one that protects us from the early-stage nature of the startups by tying the loan debt to their bank deposits and allowing us to fully call in 100% of the debt in the event that their bank deposits drop below a safe level. We can then issue that type of debt through lender financing loans to hundreds of new lenders right here in Silicon Valley (new lenders that also want to capitalize on the $150B gap created by the fall of SVB but don’t have the existing revenue or portfolio size allowing them to get lender financing).


What Sets GFC Aside From Other New & Small Lenders

What sets us aside from other lenders that don’t have sizable current revenue or portfolio size is because we are not just another lender, first, we are a lender to lenders, and second, we are working to completely “dusrupt” the industry (in a good way) by financing new & small lenders (that would otherwise not be able to obtain lender financing) through our newly invented financial model/new form of lender financing we call “Chain Lender Financing.”