Happy Wednesday, and welcome back to Dry Powder.

The collapse of Silicon Valley Bank, some seven months ago, was shocking in its speed, but also for the way in which the bank’s leadership recklessly disregarded the most obvious financial warning signs. (Even a first year analyst could have told you that interest rates were bound to rise.) In today’s issue, my conversation with a former SVB executive about the “insane” culture that led to its demise.

It’s safe to say that while there are some technical differences, the Barr Report, the O.I.G. Report, and the Bair Report are largely in agreement that SVB’s management made the fatal mistake of failing to realize that the bank’s liabilities (its deposits) were short-dated and could flee the bank in an instant, while its assets (billions in long-term Treasuries and other bonds) were long-dated and could not be easily turned into cash, except at a discount, meaning big losses (as happened at the end).

When the bank’s well-heeled depositors freaked out last March and feared that the bank would fail, they withdrew their money as quickly as possible. Of course, because of our so-called “fractional” banking system, most of those deposits weren’t at Silicon Valley Bank. Rather, they had been lent out to borrowers or invested in long-term Treasuries, some of which were sold to Goldman Sachs at a big loss for the bank. Unfortunately, the bank’s board of directors failed to contemplate, incredibly, the fact that even supposedly safe Treasury securities can lose value in a rising interest rate environment, and especially so during a bank run.

How the bank’s executive committee and its board of directors failed to perceive that the 13-year run of easy money would inevitably come to an end is beyond me. Equally inconceivable: leaving the bond portfolio largely unhedged when the likelihood of a rising interest rate environment was upon us. The Barr Report concluded that SVB’s collapse was primarily the result of SVB’s “senior management” failure to “manage basic interest rate and liquidity risk” as well as the failure of SVB’s board of directors to provide “effective oversight.” Bair likewise concluded that “the fundamental mismanagement of [SVB] … violated basic ‘Banking 101’ principles of asset and liability management.”

The ongoing mystery is how the top executives at the bank—C.E.O. Greg Becker and C.F.O. Daniel Beck, who together were paid nearly $40 million during the three years ending in 2021, according to the bank’s proxy statement—could have made such basic mistakes.

To try to answer that question, I spoke with a former bank executive for SVB, who gave me a sense of what it was like to work at Silicon Valley Bank in the years leading up to the bitter end. The executive, who joined SVB in the years before the pandemic, remains in a state of “shock” about the bank’s demise and believes “it did not have to happen.”

“It was insane,” the executive recalled. “They thought they were managing this special private club, that wasn’t a bank. But what was special about it, if you were working there, was that the compensation was stupid. We thought, like, Why would you want to invest in risk management or technology infrastructure? Because, as we all were told all the time, well, that’s going to dampen down on profits, and that’s gonna dampen down on the formula we use to get our bonuses. They weren’t thinking of it as a bank. They were thinking of it as a private club that can choose their bonuses every year, because the bonuses got juiced like they were traders. You know, obviously that’s an exaggeration. But compared to a regular bank, the bonuses were juiced like they were traders. I watched it. And there were no sort of metrics to give them out.”

This executive blames Becker for giving Beck too much authority and power to run the bank. This person believed Beck was inexperienced—he had been C.F.O. of the much smaller Bank of the West for two years before become C.F.O. of SVB in June 2017—and described him as an “arrogant” manager who ran the bank through “fear.” Beck “held the checkbook of the bank, so he controlled all the resources by holding the checkbook,” the executive said. “And he could do whatever he wanted, running everything in a black box, and no one would ever question because he had the power to get you fired. And so he ruled the roost by fear. The board and C.E.O. allowed him to do that.” (Beck could not be located for comment.)

The problems at the bank were compounded by the fact that SVB, despite its very provenance, was behind the curve on banking technology. And this weakness was exacerbated during the pandemic when it was flooded with deposits. In effect, SVB didn’t have the technological infrastructure to handle the influx of deposits that came into it during the pandemic, nor the investment skill to manage all that new money. It took what appeared to be a safe route of investing in long-dated Treasuries but failed to recognize that in a rising interest rate environment they would lose value if they had to be sold quickly to fund a run on the bank, which, of course, is exactly what happened in March 2023. “From the minute I got there,” the source continued, “as all the pandemic deposits came in, everyone was so busy keeping Humpty Dumpty with rubber bands and paper clips from falling off his perch, that there was no time to do anything else other than to try to keep the ship from sinking and keep it afloat.”

As for the federal and state regulators who should have been focused on the bank’s liquidity and on its capital, their focus seemed to be more on other matters, such as cybersecurity risk and third-party risk management. “There was really no focus on capital and liquidity, for sure,” the executive continued, “and not on liquidity until the end.”

SVB went from $70 billion of deposits to $200 billion of deposits, thanks in large part to the pandemic. “If somebody had an I.P.O. one day, they had $100 million in checking, the next day they had $3 billion in checking,” the executive continued. “Or if somebody made a deal one day they’d have $500 million in checking and then they’d have $1 billion. It literally happened that fast.”

When the Federal Reserve reduced interest rates back to zero during the pandemic, SVB’s clients got richer and richer and those riches found their way into SVB’s coffers. “And we didn’t really know what to do with it,” this person continued. “We had so much money, we didn’t know what to do with it. And there were conversations about, Well, maybe we should slow down, but how do you tell your clients not to give you money?”

The executive said the “cake was already baked well before March 10, when it failed.” Indeed, in the 24 hours before SVB collapsed, Becker told his team the bank had lost $40 billion in deposits in four hours. That’s when a call was set up between Becker, the Fed, the F.D.I.C. and the state of California. “We’re not going to make it,” they were told. “Help us.” SVB executives stayed up all night on the WebEx call “hoping, hoping something would happen.” But, the banker continued, “the Fed was so incompetent with the discount window. We were so incompetent, setting up our ability to borrow from the discount window. You know, at dawn when we were eventually publicly closed, I was sort of like, Wow, this shit show has finally come to the end.”

Incredibly, the banker concluded, there was more relief than grief that the saga was finally over. “The good news,” the executive thought, was “‘You don’t have to chase them anymore and try to look for a different outcome. Now the outcome is there and you can try to get your life back.’ And so, you know, there is something to be said for that.”

Then there was one more beat. The banker made the comparison between what happened at Silicon Valley Bank and the famous line in Hemingway’s The Sun Also Rises, “How did you go bankrupt? Two ways. Gradually and then suddenly.” To the banker, “what happened during Covid as the bank tripled in size (the ‘gradually’ part) is more disturbing than what happened at the end (the ‘suddenly’ part) as the bank failed. Without the gradually, there is no suddenly.”