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By Echo Wang, Lananh Nguyen and David French
NEW YORK (Reuters) - As SVB Financial Group wrestled with a capital shortfall and the prospect of a downgrade to its credit rating last week, it went to Goldman Sachs Group Inc and worked out an unusual two-part plan, according to people familiar with the discussions.
The investment bank would buy a $21.5 billion bond portfolio from SVB to boost its coffers, after startups began pulling their deposits from the technology-focused lender, which does business as Silicon Valley Bank.
But there was a hitch. Goldman's offer for the portfolio was worth $1.8 billion less than the book value SVB had assigned to it, because a rise in interest rates had made it less valuable. SVB would have to book a loss on the portfolio, which comprised U.S. Treasuries and related bonds.
The next step was for Goldman to put together a solution. It would help organize a $2.25 billion stock sale for SVB to fill the funding gap caused by the bond portfolio sale, two of the sources said.
Goldman delivered on only the first step of that plan. Once the bond portfolio deal was completed, the storied investment bank didn't have time to convince investors to lock in capital and overcome concerns about depositors pulling money out of SVB.
The tight turnaround left insufficient time to prepare materials for investors by early last week, one of the sources said. The stock sale collapsed and SVB became the largest U.S. bank to fail since the 2008 financial crisis, fueling concern about other lenders and prompting regulatory interventions to backstop customer deposits.
Yet for Goldman, the botched deal had a silver lining. The bond portfolio it acquired from SVB is now worth more, based on the drop in Treasury yields since the transaction happened. Traders not affiliated with the deal that were interviewed by Reuters estimated the gain in value to be in the hundreds of millions of dollars. A source familiar with details of a hedge that Goldman's trading desk put on the deal said the gain would be less than $100 million.
It is unclear whether Goldman has held onto all or part of the bond portfolio or sold it. Goldman declined to comment. SVB did not respond to a request for comment. In a regulatory filing on Tuesday, SVB said its bond portfolio sales to Goldman were done at "negotiated prices".
Goldman was not paid the underwriting fee it had agreed for the stock sale because that deal fell through, two of the sources said. SVB has not disclosed how much that fee would have been.
Details provided by six people familiar with the attempted capital raise show that Goldman and SVB underestimated the challenges of pulling off the capital raise in terms of timing and investor interest. Only two private equity firms were ultimately invited to participate in the capital raise last week - General Atlantic and Warburg Pincus. SVB and Goldman hoped stock market investors would chip in for the remainder, four of the sources said.