How Goldman’s plan to prop up Silicon Valley Bank fell apart

The talks, held over the course of about 10 days, culminated in a March 8 announcement of a nearly $2 billion loss and a planned stock sale that scared the hell out of investors. SVB Financial Group SIVB -60.41%

shares tanked the next morning. Startup and venture capital clients with large uninsured balances panicked, trying to pull $42 billion out of the bank in a single day.

While few could have predicted the market’s violent reaction to the SVB’s revelations, Goldman’s plan for the bank was fatally flawed. It underestimated the danger that a deluge of bad news could trigger a crisis of confidence, a development that can quickly bring down a bank.

Goldman is the advisor to the rich and powerful. It handles mergers, helps companies raise money and comes up with creative solutions to thorny situations of a financial nature – a talent that has made the company billions.

But for SVB, Goldman’s gilded advice came at the highest price possible. SVB collapsed with great speed in the second largest bank failure in US history, sparking a transatlantic banking crisis that regulators are furiously trying to contain.

This account of the last days of the SVB is based on interviews with bankers, lawyers and investors who almost got involved in the doomed deal.

The SVB’s problem was mechanical: banks make a profit by earning more from putting money to work than they pay depositors to keep it with them. But the SVB paid to keep savers from leaving, and was stuck earning a pittance on low-risk bonds bought in times of low interest.

Selling a slug of those bonds would relieve the pressure: SVB would have extra cash on hand, and it could use at least some of that money to buy new bonds that yield more. Still, the transaction came with a big asterisk: SVB would have to realize a big loss.

SVB executives came to Goldman with the outline of a plan to raise capital. Two private equity firms, General Atlantic and Warburg Pincus LLC, were on the bank’s list of potential investors.

The executives wanted to do a private placement of shares — a deal where they would quietly line up investors to buy a certain number of shares at a fixed price — and they wanted to do it quickly. Moody’s was preparing to downgrade the bank, a move its executives feared would alarm investors.

Bankers from Goldman’s equity capital markets firm, led by David Ludwig, and the group of financial institutions, led by Pete Lyon, began putting together a share sale in the first week of March and approached the two private equity firms.

Goldman presented a hybrid public-private stock sale: the company would find enough investors to fully fund a $2.25 billion deal, but would also offer the public the option to buy shares at the same price.

By March 5, Warburg had dropped out. It needed more time to evaluate the deal than the SVB was willing to give and did not want to participate in an offer with a public door.

Another deal was struck on Goldman’s trading desk. SVB was looking for a buyer for its $21 billion available-for-sale debt securities portfolio. The buyer would be Goldman.

General Atlantic, meanwhile, agreed to put up $500 million in the stock sale. But time was running out to get more investors lined up to deliver the remaining $1.75 billion SVB wanted to raise. SVB executives were not ready to give investors the information they needed to get everyone on board.

Goldman decided the only option was a public stock offering anchored by General Atlantic. SVB directors signed up to the plan.

Mr. Ludwig and others at Goldman felt that SVB had to act quickly. Moody’s downgrade was coming and then the bank would close for the weekend. It’s better to get all the bad news out of the way to avoid a meltdown on Monday.

On March 8, Goldman completed the purchase of SVB’s securities portfolio at a discount to market value. After the market closed, SVB announced it had realized a $1.8 billion loss on the sale, without disclosing the buyer, and said it would sell shares to raise capital.

At that time, the SVB management team was already bracing for the bad news. Just before the bank launched its doomed stock sale, it hired deal consulting firm Centerview Partners to research a Plan B.

Goldman bankers were still confident that the share sale would succeed. Shares of SVB initially fell about 8% in aftermarket hours, not as sharp a drop as feared, and Goldman’s bankers got a lot of orders to buy shares.

The mood changed less than an hour later when another bank, Silvergate Capital Corp.

, announced it was closing after a run that drained its deposits. A one-notch Moody’s downgrade, less severe than SVB executives feared, landed around 8 p.m.

SVB shares plummeted when the market opened on March 9, forcing customers to withdraw their deposits. It was the start of a downward spiral: As news of the deposit run spread, shares fell further, prompting more customers to yank their money. The stock closed more than 60% lower.

Still, the deal wasn’t dead yet. Goldman had lined up a series of investors at $95 per share, about $11 less than the day’s closing price.

Around 5 p.m., Goldman’s bankers received a notification about the outflow of deposits from the SVB.

The bank’s lawyers at Sullivan & Cromwell LLP said the deal could not go through without disclosure of deposit losses. Goldman backed out of the deal. The Federal Deposit Insurance Corp. confiscated SVB before it could open the next morning.

Write to AnnaMaria Andriotis at annamaria.andriotis@wsj.com, Corrie Driebusch at corrie.driebusch@dowjones.com, and Miriam Gottfried at Miriam.Gottfried@wsj.com