Executive pay at SVB soared after big bet on riskier assets
Executive pay at Silicon Valley Bank soared after the bank embarked on a strategy to boost profitability by buying riskier assets exposed to rising interest rates, according to a Financial Times analysis of securities filings and people familiar with the matter.
The jump in pay for chief executive Greg Becker and chief financial officer Daniel Beck was a result of large multiyear bonus awards pegged to the bank’s return on equity (RoE), a key measure of profitability that rose sharply between 2017 and 2021, the filings show.
Becker’s cash bonus peaked at $3mn in 2021, more than double the amount he received four years earlier. Beck earned a $1.4mn bonus in 2021, more than four times the amount he received in 2017 after joining the company.
The higher bonuses helped push Becker’s total pay to $10mn in 2021, an increase of almost 60 per cent compared with four years earlier. Beck earned nearly $3.8mn, a jump of roughly double over the same time period.
Current and former SVB executives told the Financial Times that SVB boosted returns by buying long-term paper, especially mortgage bonds, that bolstered earnings because they generated higher yields. The strategy backfired when interest rates rose sharply and depressed the value of the bonds.
In 2016, the year before Beck became CFO, the average duration of SVB’s securities portfolio was just 2.5 years, meaning it held relatively short-term debts that carried lower yields and crimped returns. By the end of 2018, the average duration had jumped to 3.8 years, helping RoE to more than double to 20 per cent and resulting in the big jump in bonuses.
Duration measures how much a bond’s price will move when interest rates rise or fall. It was a gauge many investors were able to look past when rates were low and did not move dramatically. But when the Fed began tightening last year, long-term debt that had been issued in the preceding years plunged in value.
In 2021, a flood of deposits flowed into the bank after its clients — most of them technology businesses based in Silicon Valley — experienced a pandemic-fuelled boom in new funding. The bank subsequently assembled a massive $125bn securities portfolio consisting mostly of long-dated mortgage bonds. By the end of that year, the average duration was 4 years and RoE was 17 per cent.
Towards the end of 2022, as SVB’s customers battled tougher economic conditions, they started yanking deposits from the bank. That forced the lender to sell a chunk of its long-dated bonds at a $1.8bn loss earlier this month. A bungled attempt to raise capital to plug the hole in its balance sheet fuelled a run on the bank and forced the government to step in and seize the bank.
“We’ve seen just incredible liquidity growth coming through the end of last year and continuing through the quarter,” said Beck in a first-quarter earnings call in 2021. “We are comfortable being able to put some of that money to work in longer duration” securities held on its balance sheet.
One former SVB executive said: “The risk that Dan took was duration risk to get yield. There was a pressure to generate income on the new money and generate spread.”
The move effectively locked SVB’s cash away for longer periods of time and left the bank badly exposed when interest rates rose and the value of the assets fell. The portfolio lost $15bn of value last year, an amount almost equal to SVB’s entire equity, prompting fears about the bank’s solvency.
One SVB employee said Beck was given the option of shortening the duration of the bank’s assets but “usually opted” to do the opposite. “It’s not like he wasn’t unaware of the risk, he was willing to accept the risk,” they said.
Becker did not respond to a request for comment made via his lawyer. Beck could not be reached for comment. They are no longer listed as executives on SVB’s website.
Mike Puangmalai, a former activist investor and author of the NonGaap newsletter, said of the big jump in RoE in 2018: “There was some fundamental decision made in that year that clicked into place.”
He added: “When you start pushing the envelope on certain things to hit that metric in a short-term basis, that’s when you get into trouble.”
Anat Admati, a professor at the Stanford Graduate School of Business, who has researched the link between RoE and pay, said linking bonuses to the metric was an “inducement to take risk”.
It is not uncommon for banks to link pay to RoE, but Puangmalai said SVB’s attempt to dramatically shift the duration of assets during a short three-year timeframe had “created a dangerous situation”. In order to hit the RoE targets, SVB executives had little option other than deploying capital into longer duration, higher-yielding assets, he added.
Over time, executives were able to earn higher bonuses pegged to RoE, according to the filings. In 2017, Becker could receive a cash bonus equivalent to 100 per cent of his base pay by hitting the targets, while Beck could get 70 per cent. By 2022, that had increased to 200 and 125 per cent, respectively.
Last year, the pair were paid lower bonuses because SVB’s RoE fell 5 percentage points, dropping below industry peers for the first time in a decade, as it was forced to bolster liquidity by borrowing against its bonds.
Becker was awarded a $1.5mn cash bonus in 2022 and nearly $10mn in overall pay last year, while Beck was awarded a $625,000 bonus and $3.5mn in overall pay. The awards were granted even though SVB’s stock fell by two-thirds that year.
The bonuses came with so-called clawback provisions that would allow the lender to recoup the pay if the pair were found to have engaged in wrongdoing or if the bank had to restate its accounts. But there was no specific provision allowing the bank to claw back the money if the pair were found to have taken excessive risks that resulted in losses.
Conversely, at M&T Bank, an SVB rival, executive bonuses could be clawed back for “adverse risk outcomes”. The lender placed just a small portion of new deposits into long-term securities during the same timeframe.
“We’re trying to be prudent with how much duration risk we might be taking on,” said Darren King, chief financial officer of M&T on a January 2021 earnings call.