‘Chasing yield’ was an inside joke at SVB—until it led to the bank’s collapse

A reminder: SVB famously failed in March of 2023, at least in part, because it chased yield. 

Pictured are all former employees of SVB Financial Group, SVB’s parent company, including two who worked at the bank during the time of its collapse. In the center is Michael Descheneaux, SVB’s CFO from 2007 to 2017 and president thereafter until the bank’s failure. On the left is Michael Kruse, SVB’s global treasurer from July 2010 to December 2022, and then a subsidiary CFO until March 2023. And on the right is Jeffrey Palmer, director of quantitative finance at SVB from February 2009 to March 2013, and now a partner at PwC. 

Descheneaux gave this painting to Felda Hardymon, a veteran venture capitalist who spent the majority of his career at Bessemer Venture Partners, after Hardymon retired from SVB’s board and finance committee in 2011. In an interview with Fortune, Hardymon claimed the painting was a joke about how he was always reminding SVB’s leadership not to chase yield when he was on the finance committee in the 2000s and early 2010s.

“I can confirm that in the finance committee we were often pushing back on ideas to use deposits, to invest deposits in a more aggressive manner. Let me just put it that way,” he said.

About a decade later, SVB invested heavily in long-term bonds that offered slightly higher yields instead of safer short-term options, seeking a better return on investment from their deposits—“chasing yield.” Then, when interest rates rose in 2022, the value of those long bonds plummeted, resulting in significant losses that made the bank unable to cover its deposits, sparking a bank run in the spring of 2023.

While regulators, skittish depositors, and the Federal Reserve’s rapid rate hikes have all been blamed for SVB’s collapse, Hardymon—and Ken Wilcox, who spent 30 years at SVB, including a decade as CEO between 2001 and 2011—both had a simpler explanation.

As Wilcox put it in an interview with Fortune: “I just think it was bad judgment … which is the polite way of saying stupid.”

A legal representative for Michael Kruse declined to comment. Michael Descheneaux and his legal reps did not respond to requests for comment. Jeffrey Palmer did not respond to Fortune’s request for comment.

Neither Hardymon nor Wilcox worked at SVB during its collapse, and they don’t claim to have inside knowledge of the reasoning behind management’s decisions near the time of its downfall. But they both believe SVB’s underlying business model was sound and that its leadership chased yield at the wrong time, ultimately leading to the bank’s collapse. Furthermore, Wilcox and Hardymon noted this risk was well-known by many of the bank’s leaders, at least at one time. After all, it seemed to be a running joke for some of them.

Here’s another image to illustrate Hardymon’s point that conversations about chasing yield were common at SVB. It’s a photo of a polo shirt that was made for members of SVB’s finance committee back in 2011 by Deschenaux. It says: “SVB Financial Group Finance Committee ‘We will not chase yield.’” 

CEO-on-CEO

Wilcox stepped down from his position as SVB CEO in 2011 in order to focus on the bank’s global expansion, becoming president and vice chairman of SPD Silicon Valley Bank, SVB’s joint-venture bank in Shanghai. He then cut ties with SVB altogether at the end of 2019, and now works as a member of the advisory board at Columbia Lake Partners, a London-based venture debt investor.

After Wilcox left SVB, he proudly watched his successor, Gregory Becker, lean into a tech lending strategy and grow the bank into a behemoth with over $200 billion in assets. Then came the collapse.

Now, Wilcox says he’s frustrated after spending years “nurturing” Becker, only for him and his team to make critical errors that he says helped spark the downfall of SVB. 

The veteran banker detailed the last time he talked to his successor, which was some nine months ago. “I was upset, and my basic line of thought was: ‘why would the bank do that?’ Because it just doesn’t make sense to me,” he said, referencing SVB’s decision to chase yield.

Wilcox said his theory is that bankers should focus on things that are at least somewhat predictable, but Becker and his team instead ended up making a risky bet on something that can never be predicted.

“In other words, if you want a loan from me, I can analyze the situation … And I can come to an educated guess, a probabilistically positive prediction around: will you pay me back or not?” he explained.  “But guessing on the direction of interest rates, I firmly believe—and I mean this metaphorically—only God knows where interest rates are going.”

According to Wilcox, Becker responded to this critique by saying that since inflation and interest rates had been low for over a decade, he didn’t expect them to rise again anytime soon. In his written testimony to the U.S. Senate Committee on Banking, Housing, and Urban Affairs, Becker also pointed to the Fed’s “transitory” inflation call as a reason why SVB’s management believed an era of ultra-low interest rates would continue.

Becker declined to comment publicly on these claims through his legal representation, which cited pending court cases for the decision.

Of course, hindsight is 20-20, but Wilcox believes this bet on interest rates was an obvious mistake.

Chasing yield and other missteps

By the end of 2022, SVB had invested more than 90% of its held-to-maturity securities portfolio in mortgage backed securities, municipal bonds, and Treasuries with maturities of over 10 years. It was a big risk, all for a paltry 1.63% return. They certainly could have opted for shorter term securities (like Treasury Bills) that didn’t offer as much yield, but also wouldn’t have been as susceptible to changes in interest rates.

As the Fed raised interest rates the value of SVB’s long-term holdings quickly fell, leaving the bank with billions in unrealized losses and a liquidity problem that ultimately sparked a bank run. In other words, their investment went bad and they needed more money to operate.

There were other conditions and mistakes that made SVB’s collapse possible. The lack of proper regulatory oversight, the rapid social-media driven depositor flight, and even the Federal Reserve’s quick turn to aggressive interest rate hikes have been blamed for SVB’s collapse. But Brian Graham, a partner at Klaros Group, told Fortune that none of these issues would have mattered if it weren’t for SVB’s decision to invest deposits in debt securities with long maturities that lost much of their value when rates rose.

“When you look at the Silicon Valley scenario, it’s pretty clear, right? What they had were these very significant unrealized losses in their securities,” said Graham, formerly the CEO of BancAlliance, a network of more than 300 community banks. “If they did not have those kinds of losses, they would have been fine.”

Wilcox believes it wasn’t just SVB’s decision to chase yield that caused issues either. Part of the reason the bank collapsed was because management failed to control the growth of its deposits relative to its loans.

By keeping deposits appropriately sized in relation to the loans, Wilcox argued that SVB would have been able to cope with withdrawals from VCs and tech startups in the market downturn of 2022 much better, allowing them to avoid raising capital, which was what ultimately spooked SVB’s clients and led to a bank run. Hardymon backed up this claim, based on his experience as a former SVB board member and as a venture capitalist at Bessemer Venture Partners.

Wilcox and Hardymon also pointed to risk management issues, arguing SVB failed to keep its risk management team appropriately sized as the bank grew. SVB famously didn’t have a chief risk officer for eight months before it collapsed.

The pair said that regulators should bear some blame for SVB’s collapse as well.

“By God, the regulators, practically—when you’re as big as they were in 2023—they’re living with you, and they know everything you’re doing,” Wilcox said, adding: “They knew, trust me, that the long term bond portfolio was growing … so why didn’t they tell Greg?”

‘Sad days’

After years of warnings and inside jokes about chasing yield, crisis finally struck SVB on March 10, 2023.

Just two days later, Hardymon received a message from Descheneaux. It read simply: “Sad days.” The former SVB board member’s response? “Yes. You shouldn’t have chased yields. Hope you are okay.” Descheneaux didn’t respond.

Deschenaux and Hardymon appear to have maintained a friendship over the years despite the tension over jokes about chasing yield, based on text messages seen by Fortune.

Even after SVB collapsed and Hardymon had openly criticized him, Descheneaux sent an image to his old friend. It was a picture, with a laughing face emoji, from the time when Hardymon had done Descheneaux a favor by teaching a few classes at Texas A&M’s Innovation Center in 2013.

Don’t blame the business model—we still need it

Why are these former SVB leaders speaking out now, more than a year and a half after the bank’s collapse? The simple answer is they believe that their bank’s business model—which has drawn criticism from Fed officials, politicians, and more—is worth saving. 

SVB’s tech-focused lending strategies, which proved successful for decades, had little to do with the bank’s collapse, they said.

“The problem here was not the business. The problem here was a stupid mistake followed by the failure of seven lines of defense,” Wilcox said. “So wouldn’t it make much more sense to continue financing the technology industry and quit making stupid mistakes … instead of ending the story by blaming it on the business model?”

Hardymon echoed that view, arguing SVB’s tech startup lending—which involved taking risks on pre-revenue startups, and offering advisory services to help them progress—was one of the U.S.’s great “strategic advantages” over its peers. “You need it. It’s the glue that makes an innovation economy work,” he said.

Questions about the viability of SVB’s tech startup-focused business model were quick to surface after its collapse. A number of senators argued that SVB’s core business just wasn’t viable. Sen. Ted Cruz, R-Texas, called it an “obviously risky structure,” and said it was “frankly shocking” that regulators had even allowed it in an open letter to San Francisco Fed President Mary Daly. And experts jumped on the business model-bashing bandwagon almost immediately as well.

But it was the Fed’s rebuke of SVB’s business model that really upset the bank’s former leaders. In Michael Barr’s review of SVB’s collapse, the Fed’s pointman on bank supervision said that SVB’s “highly concentrated business model” was one of the key reasons for its downfall.

“I think that was a cheap shot,” said Wilcox, who worked at the San Francisco branch of the Federal Reserve earlier in his career.

Wilcox explained that 25 or 30 years ago, before SVB expanded its tech lending game, you might have been able to argue that having technology companies as your only clients was a concentration risk, because tech businesses weren’t as diverse then. 

“Today, technology is diverse. It permeates the entire economy and, I think, there was definitely sufficient diversity in our loan portfolio,” he argued.

Wilcox was famously responsible for shifting SVB’s lending strategy in the early 2000s. The bank originally loaned money to real estate companies, small businesses (mostly churches, oddly enough), and tech startups, using what it called a three-legged stool strategy. But Wilcox decided to specialize, shifting SVB to a purely tech-focused lender to take advantage of employees’ connections in Silicon Valley. 

The move ushered in a new era of growth for SVB. In 2001, the bank had just over $4 billion in assets, but by 2011, when Wilcox stepped down as CEO, it had roughly $20 billion. Given this success, the veteran banker said he would do the same thing all over again.

Wilcox went on to argue that the loss of SVB has left the U.S.’s tech-lending ecosystem ailing, and that will—at least on the margin—hamper the industry’s growth for years to come. 

To his point, as the Financial Times reported earlier this year, Silicon Valley Bank hasn’t been replaced with another similarly tech-friendly, one-stop-shop bank. And those that have tried to take on the role haven’t had the appetite to invest in startups that don’t yet have revenue, or are losing money, like SVB did for decades with (mostly) great success.

For Wilcox, that’s evidence that his bank provided an invaluable service that helped boost U.S. productivity, and he believes that’s something worth defending.

“I think [the loss of SVB is] a crying shame, and not just because so many individual people were hurt, but there’s a hole in the financial services system right now,” he said. “I don’t think the Federal Reserve, or the regulators in general, are going to let any bank operate like SVB used to operate…that puts us at a competitive disadvantage internationally.”