Silicon Valley Bank’s 2023 collapse draws deep similarities to the most notable bank failure in East TN history
Insistent—even demanding—messages from reporters in Tennessee and throughout the country were growing into an ever-higher stack on my desk, all asking essentially the same questions: is Knoxville financial organization Southern Industrial Banking Corp. going under, and, if so, what would happen to investors’ money?
Nothing was easy about the drama that played out in boardrooms, conference rooms, and courtrooms over the financial disaster that almost exactly 40 years ago took down the East Tennessee financial empires of Jake and C.H. Butcher, of which Southern Industrial Banking Corp. (SIBC) was a part. Memories of those days’ intensity were rekindled in the wake of the March 10, 2023, collapse of the California-located $212 billion Silicon Valley Bank (SVB), the second-largest bank failure in U.S. history.
The Butchers in the late 1970s and early 1980s controlled more than two dozen banks and financial institutions in Tennessee and Kentucky. Jake had run for governor in 1978, losing to Lamar Alexander. The Butchers built the first and started the second of Knoxville’s two tallest downtown skyscrapers. Their flamboyant lifestyles were legendary. It was a whirlwind of financial success and excess–until United American Bank (UAB), the tall hog at the Butcher money trough, was shut down by regulators in February of 1983, beginning the end.
But within days, SIBC again ramped up its sales efforts, promising unrealistic returns on investment certificates. I was in the commissioner’s office when in a phone call [John C.] Neff told C.H. Butcher to stop. Immediately.
I saw some of the SIBC drama from the inside. At age 29, I was the public information director for the Tennessee Department of Commerce and Insurance. This experience enabled me to envision what must have been intense efforts to keep California’s SVB afloat, just as there were to keep SIBC alive—more than 6,000 of its depositors weren’t insured by the Federal Deposit Insurance Corp. (FDIC). SIBC wasn’t regulated by federal authorities, or even the state’s banking department; instead, the insurance department had regulatory authority through its industrial loan and thrift division. When I asked my boss, the late John C. Neff, then the state insurance commissioner, why the department had oversight of a financial institution, he said it was probably the result of a lobbyist’s work many years earlier. And, he added, the state’s industrial loan and thrift laws were weak.
In late February of 1983, the commissioner called me to his office to say he was flying to Knoxville to meet with SIBC officials, including SIBC owner C.H. Butcher. When Neff returned, he said that Butcher had agreed, in lieu of an order, that until certain financial conditions were met SIBC was to stop selling investment certificates and advertising that certificates were for sale. Butcher, he said, agreed.
But within days, SIBC again ramped up its sales efforts, promising unrealistic returns on investment certificates. I was in the commissioner’s office when in a phone call Neff told C.H. Butcher to stop. Immediately. Butcher argued that the conditions had been met, but the commissioner was having none of it. A March 8, 1983, “consent agreement” between the department and SIBC said that SIBC would ‘’cease and desist in the future offer and sale of investment certificates or any other securities without full and fair disclosure of S.I.B.C.’s business practices and financial condition.’’
After the call, I asked the commissioner how it had gotten to this point for the Butchers. On a piece of paper, he drew a triangular shape, writing UAB; (C.H. Butcher’s) C&C banks; and SIBC, drawing arrows from one to another. He said that in the past, the Butchers had advance notice about examiners’ visits. The pattern was to shift bad or questionable loans to the entities not being examined. This time, Neff said, examiners showed up at UAB and C&C banks simultaneously, and unannounced. There was nowhere, and no time, left for the Butchers. The whole scheme was more complicated than that, he said, but what he’d drawn was the significant element.
In SVB’s case, it had a substantial amount of money in long-term treasury bonds during a time when the US, because of Covid, was seeing historically low interest rates. As the Fed increased interest rates, SVB sold its long-term investments at a loss to meet cash demand for withdrawals from increasingly worried tech industry investors already hit by a downturn: $42 billion was withdrawn in a single day. SVB’s fate was sealed.
Reading about actions of SVB bank officials before its flame-out, some of what was reported was eerily familiar to C.H. Butcher speaking about his plans to keep SIBC afloat.
• From CNN Business, March 13, 2023: (SVB president Greg) “Becker and his leadership team revealed last Wednesday night a hope (but no firm commitment) to raise $2.25 billion in capital as well as $21 billion in asset sales that sparked a $1.8 billion loss.”
• A New York Times story of March 9, 1983: “On Feb. 17 Mr. Butcher said at a news conference on the sidewalk in front of the C&C Bank of Knox County, the group’s lead bank, that he would put $20 million of new funds into Southern Industrial. Of that amount, Mr. Butcher said he would invest $5 million of his own money. Another $5 million was to have been made available through the purchase of loans from Southern Industrial by one of the C&C banks. And $10 million more was to have been made available by the purchase of consumer loans from Southern Industrial by First Tennessee National.”
Before SIBC announced its bankruptcy filing, media calls were coming to me without letup. The truth: the department had reviewers at SIBC, but they hadn’t completed their work. What I could say was described in the March 9, 1983, New York Times story: “Tennessee’s Insurance Department has been examining Southern Industrial since the end of January, according to George Korda, a department spokesman. But he said the examination probably would not be completed for at least a month.” In the end, the law required that all SIBC withdrawals made within 90 days of the bankruptcy had to be returned.
SVB, SIBC, or whatever the name, vast amounts of peoples’ money, personal and professional reputations, political fallout, and potential legal ramifications create the complicated abyss that opens beneath financial institution failures. The tension is almost tangible. I know this, having touched some of it myself.