Vanguard Group's mutual funds have potentially lost more than $3 billion over the past few days through its stake in banks that have failed or experienced plummeting share prices due to industry volatility.
The Malvern-based investment management giant is the largest shareholder in two banks that have been closed by federal regulators in the last four days — Silicon Valley Bank and Signature Bank — as well as PacWest Bancorp and First Republic Bank, which have seen their share prices tumble since SVB's collapse on Friday. Vanguard has the second-largest stake behind T. Rowe Price Group (NASDAQ: TROW) in another bank that has seen a major decline in stock value, Western Alliance Bank.
Vanguard’s funds have lost about $1.5 billion from SVB and Signature alone since March 6 and almost $3.7 billion when including all five banks, based on its position in each company at the end of 2022.
The government has taken control of both Santa Clara, California-based SVB and New York-based Signature and is searching for buyers to purchase the banks’ assets. Investors are lowest on the pecking order to get paid back once a deal is made, and experts believe there's a good chance they recoup just pennies on the dollar — or nothing at all — from their investments.
A Vanguard spokesman said the exposure of its funds to SVB and Signature Bank is “very low.” Vanguard’s total exposure via U.S. domiciled funds to SVB Financial Group was 0.02% of Vanguard fund assets as of December 31, 2022, he said. Exposure to Signature Bank was just 0.01% of Vanguard fund assets. Vanguard has roughly $7 trillion in assets under management, making it the second-largest investment firm in the world and the largest mutual fund company.
“These limited exposures underscore the importance of broad diversification,” the Vanguard spokesman said. “This situation remains extremely fluid. Vanguard is closely following the rapidly evolving situation. Vanguard is committed to effectively stewarding our investors’ assets and will make adjustments accordingly within our funds, as necessary.”
The stocks of the five aforementioned banks were relatively steady this year until last week's turbulence. Many regional bank stocks roared back in Tuesday trading, including some of the more troubled institutions. Here's a breakdown of how much Vanguard lost amid the upheaval as of market close on Monday, according to U.S. Securities and Exchange Commission filings:
- Silicon Valley Bank — Vanguard held almost 6.7 million shares of the bank’s stock as of Dec. 31. The shares were trading at $283.04 as of March 6 — a few days prior to the announcement of the bank failures and ensuing stock tumbles. That meant the position was worth $1.9 billion. Following the closure of SVB, the bank's shares were frozen at $106.04, which means Vanguard’s stake is worth $706 million, down 63%, or almost 1.2 billion.
- Signature Bank — Vanguard held almost 7.3 million shares of the bank’s stock as of Dec. 31. The shares were trading at $110.89 as of March 6, putting the value of the position at $808 million. Following the closure of Signature, the bank's shares were frozen at $70, which means Vanguard’s stake is worth $510 million, down 37%, or $298 million.
- PacWest Bancorp — Vanguard held just under 13.6 million shares of the Los Angeles-based bank’s stock as of Dec. 31. The shares were trading at $27.40 on March 6, giving Vanguard's position a $372 million value. PacWest’s stock price closed Monday at $9.75, valuing Vanguard’s stake at less than $133 million — meaning it lost 64%, or $239 million, of its value.
- First Republic Bank — Vanguard held 20.5 million shares of the San Francisco-based bank’s stock as of Dec. 31. The shares were trading at $122.07 on March 6, giving Vanguard's position a $2.5 billion value. Trading of First Republic’s stock was halted Monday for volatility but opened Tuesday at $49.69, giving Vanguard’s stake a value of about $1 billion — meaning it lost 59%, or $1.48 billion, of its value.
- Western Alliance Bank — Vanguard held 12.5 million shares of the Phoenix-based bank’s stock as of Dec. 31. The shares were trading at $75.39 on March 6, giving Vanguard position a $942 million value. Trading of Western Alliance’s stock was halted Monday for volatility but opened Tuesday at $38.66, giving Vanguard’s stake a roughly $483 million value — meaning it lost 49%, or $459 million, of its value.
Andrew Bulgin, a securities lawyer at Baltimore-based Gordon Feinblatt, told the Baltimore Business Journal that institutional investors like Vanguard would have trouble selling their stakes. Even if they could sell, they might not get the current frozen value. Bulgin said that when a failed bank is taken over by the FDIC, the regulator looks to sell the deposits and loans. When a sale is finalized, the FDIC will then distribute the funds to those who used the banks. Unfortunately for Vanguard, Bulgin said the pecking order starts with insured depositors, then goes to uninsured deposits and then to general creditors before stockholders get paid back.
“Given the nature of bank receiverships and the fact that stockholders are last in line, it is uncommon for a bank’s stockholders to receive anything for their stock,” he said.
Alyssa J. Brodzinski, a partner at Conshohocken-based Royer Cooper Cohen Braunfeld and the co-chair of its banking and finance practice, said that the best-case scenario for investors like Vanguard might be getting pennies back years in the future. She said unlike during the 2008 financial crisis, the FDIC and Federal Reserve will not be bailing anyone out. Brodzinski said the best comparison to what could happen to Vanguard's shares is what happened to Washington Mutual's shareholders when that bank collapsed in 2008. Washington Mutual was purchased by JPMorgan Chase & Co., but its parent company went through bankruptcy. It took a lawsuit from shareholders to get pennies back on the dollar.
“It took three years after the failure of that bank for Washington Mutual's holding company to go through bankruptcy and I think its shareholders ultimately got 5 cents a share after all was said and done,” Brodzinski said. “And that is the best-case scenario.”
— Garrett Dvorkin of the Baltimore Business Journal contributed to this story.
The article delves into Vanguard Group's substantial losses in various banks, primarily due to plummeting stock prices and bank failures. Vanguard, a colossal investment management firm, suffered significant hits in banks like Silicon Valley Bank, Signature Bank, PacWest Bancorp, First Republic Bank, and Western Alliance Bank. These losses amounted to billions of dollars, as detailed in their stock holdings and subsequent drops in share value.
Vanguard's exposure to these troubled banks was initially considered low, representing only a small fraction of their total assets under management. However, the volatility in these bank stocks led to staggering losses for Vanguard's funds. The situation reflects the risks associated with concentrated investments and emphasizes the importance of diversification in investment portfolios, as noted by a Vanguard spokesperson.
The dynamics of bank failures and the subsequent repercussions for stakeholders, including investors like Vanguard, are discussed. Experts highlighted the challenging prospect for institutional investors like Vanguard to recover their investments in failed banks, given the hierarchy of repayments during bank takeovers by regulatory bodies like the FDIC. The likelihood of investors recouping their investments in such scenarios appears bleak, with the possibility of receiving mere fractions or even nothing at all.
The comparisons drawn to past instances, such as the fate of Washington Mutual's shareholders during the 2008 financial crisis, illustrate the potential outcome for investors like Vanguard. The overall sentiment conveyed by legal and financial experts suggests a grim outlook for shareholders seeking to reclaim their investments following bank failures.
This situation underscores the inherent risks within the financial industry and the challenges faced by large institutional investors like Vanguard when dealing with such unforeseen market disruptions and bank collapses.
