First Republic Bank is seized, will be sold to JPMorgan

Spencer Platt

Regulators have taken possession of First Republic Bank (NYSE:FRC), resulting in the third failure of an American regional bank since the collapse of Silicon Valley Bank (OTC:SIVBQ) and Signature Bank (OTC:SBNY) in March. The Federal Deposit Insurance Corporation has been appointed as receiver and accepted a bid from JPMorgan (NYSE:JPM) to assume all deposits, including all uninsured deposits, and substantially all assets of First Republic Bank. That includes $173B in loans and about $30B of securities, though it will not assume First Republic's corporate debt or preferred stock. Premarket movement: FRC -32.8% to $2.36/share; JPM +3.6% to $143/share.

Fine print: "Our government invited us and others to step up, and we did," said JPMorgan (JPM) CEO Jamie Dimon. "Our financial strength, capabilities and business model allowed us to develop a bid to execute the transaction in a way to minimize costs to the deposit insurance fund" (which is estimated at about $13B). The FDIC will also enter into a loss-sharing agreement with JPMorgan (JPM) on single family, residential and commercial loans, and provide $50B in financing to the bank. Meanwhile, JPMorgan (JPM) is set to realize a one-time $2.6B gain from the deal, but expects to spend $2B on restructuring costs over the next 18 months.

It's been a wild ride for First Republic, which has teetered on the brink of failure for nearly two months. The bank's business model, which funded cheap mortgages to wealthy clients from little or zero-interest deposits, got hammered when rates rose rapidly. Clients then panicked and major paper losses ensued for its long-dated assets. Last week, First Republic revealed that deposit outflows totaled $70B in Q1, and put the spotlight on Wall Street institutions that deposited $30B at the bank on March 16 to stave off additional fallout to the industry.

Outlook: Is this the closing chapter of the banking turmoil that started in March, or just the next phase in the crisis? SA Investing Group Leader Lance Roberts discusses how things will end, Mott Capital Management explores the impact on rates, while contributor Bill Kort examines how flight-to-safety trades have played out since the turmoil. Other ongoing and systematic concerns are whether the nation's largest banks are getting even bigger, and how the tightening of the current lending environment will translate to the real economy.

More on the regional bank crisis

• A Look At First Republic Bank's Death Spiral
• Federal Reserve bears some of the blame in Silicon Valley Bank's failure in review
• First Republic: When Preferred Equity Goes To Zero, Part 2

Comments

[larrych66]

How is that JPM gets to buy the assets at a discount along with the deposits and walks away from assuming any liabilities along with blowing off investors? Looks like a one way street with the investor getting caught going the wrong way.

[Long-Short Manager]

What's crazy is how weak interest rate risk management has gotten at so many banks. All those annual stress tests etc has no scenarios where rates rise significantly. No relationship between having FDIC insurance and how good your risk management is. This would be like an auto insurer charging the same to someone with 5 DUIs and a dozen speeding tickets as to the safest grandma driver. It never happens outside of government schemes.

[Happy Jack]

@Long-Short Manager Yet they all knew this was going to happen. They had plenty of time too deal with it. Of course the other thing they could have done to prevent this was simply give their lenders (depositors) a better rate of return as rates rose thus preventing the mass exodus. But no .... they got greedy.

[not_sure_68]

Where did the FDIC get $50b to "loan" to the biggest bank in the world? ...and from whence is this authority derived? The FDIC allegedly exists to insure bank accounts, they're not authorized to loan .5 trillion dollar banks funds. If the FDIC is funding this loan, then how does that not lower the amount of funds available to insure the remaining $17t in deposits at US banks?

The treasury general account itself has only $291b in there and I've been told we're heading toward another installation of debt ceiling theater. Why the heck is treasury allegedly drawing down 17% of remaining funds to loan to JPM?

[Happy Jack]

@not_sure_68 The Fed printed the money and the FDIC then pays them back.

[Big Tex 6988]

So, if I live in a $5 million house but only carry $250,000 of insurance, do I get to collect $5 million in insurance proceeds if my house burns down? The answer is yes if you donated to the right political party. Our democratic republic driven by free markets was nice while it lasted. I am trying to get my taste buds accustomed to Klaus' bug salad.

[Elons Mum]

@Big Tex 6988 The answer is actually yes if you donated to either political party and you're a big baller like Dimon.

However, if you donated to AOC, Bernie, or Senator Warren, they'd only give you the 250 and they'd share your house with the rest of your hood ;)

[PeacanPie]

The issues these banks have found themselves trying to manage was created way before COVID lockdown and interest rate started rising. Rising interest rate only made the outcome appear earlier that it would have. Bad decision making, inept risk management, with highly paid decision makers not taking ownership for their mistakes. A regular employee who made such costly mistakes would be fired immediately with no compensation. Yes, KPMG, should be liable for failing to do the due diligence they were paid to do. It is clear all parties were aware but turned a blind eye.

This quote below from the article shows the risk they were taking:

"The bank's business model, which funded cheap mortgages to wealthy clients from little or zero-interest deposits,"

Wouldn't we all working class people love to get our mortgages cheap or for little/zero interest deposit.

[larrych66]

Here’s an idea from the government: let’s shut down the economy for a health crisis then print trillions of dollars to compensate and when resulting inflation rages then jack up interest rates in record time…and then wonder why there’s collateral damage everywhere including banking?

[dmaroz]

@larrych66

lol. that about sums it up. we could all add more but why beat the dead horse.

[Dr0Doom]

@larrych66 You forgot: Let's wait 8 months after inflation first rears it's ugly head to do anything, and tell the masses it's just "transitory".

[Eformula]

@larrych66 no the government didn't shutdown the economy it did that shit by itself when millions were furlough/temp laid off...

[not_sure_68]

The dollar index is mysteriously up on this news. Like forex traders don't even realize there's about to be a whole lot more debt digits conjured from thin air to make uninsured depositors whole again...in direct contradiction of US color of law. Could these markets possibly get any more fake? ROFL

"Well ya know, if the unelected convicted felon at the ECB conjures euros just 0.02% faster than the fed then the US dollar index should really go up."

We're living a cartoon here folks.

[Default Smeller]

@not_sure_68: lol. Are you ever turning your brain on before issuing an opinion? The world is awash with US-dollar debt (and M2 - US-dollar supply - is contracting YoY for the first time since 1932). And debt needs to be repaid. It becomes ever harder to service, debtors not yet in default need to scramble ever harder to get their hands on US-dollars to service their debt. That equates to US-dollar demand - at a time where supply is shrinking. Any questions why the USD is moving up?

[not_sure_68]

@Default Smeller I understand all that. Export inflation on a grand scale and nations everywhere will abandon their currencies in favor of US dollars...which seem stable relative to their rapidly devalued debt based dog barf. This is true of the Lebanese Pound, the Venezuelan Bolivar, the South African Rand, the Argentinian Peso, the Turkish Lyra, etc etc.

Do you ever turn on your brain and consider anything other than the impact on financialized assets denominated in US dollars?

LMAO that you think the US debt or $300 trillion in world debt will ever be paid. At what point does the US federal regime pay down a penny of debt without creating more debt to pay that debt? The US dollar is moving up because everything else is losing value FASTER than the US dollar. You don't actually think your dollars are going to buy more of anything real anytime soon do you? ...just because M2 is contracting a little bit? Everyone knows the US dollar is the cleanest shirt in the laundry, it doesn't change the fact that it's being massively devalued right in front of your face.

[Default Smeller]

@not_sure_68: it is again you not just turning your brain off but obviously also your eyes. I never said all this debt will ever be repaid - show me where I did. But as long as debtors TRY to do it the dollar goes up. And when they default, USD-liquidity dries up even more - and it goes up more. Ever heard the term "debt deflation"? There you have it.
I also never said I believe "my dollars" (of which as a non-US citizen I do not hold a lot LMAO) will buy me more of anything real anytime soon - show me where I did. But the Double Eagle Gold coins of face value 20 USD of which I hold quite a few along with a lot of additional gold positions mainly initiated in the late 1990s, THEY buy me still about the same amount of stuff they bought when they were minted.
BUT - here you have something to chew upon: I predict that 4000 dollars will buy 3 times as many US-stocks (say the S&P 500) or even more 2-3 years from now than they do today. Don't believe me? Look how many Japanese shares you could buy in 1999 and in 2009 for 30.000 yen. (Hint: all this happened in the aftermath of a huge credit-fueled or debt-driven maniac bubble - but no, of course we do not have that in the US or anywhere else in the world).
Already looking forward to your reply. I am sure you can't hold yourself back lol.

[JustLikeThat]

Why no one is talking about the Auditor's role in banks' failures? Why KPMG should be given clean chit? Why do they charge millions of dollars if they can't ensure the risks involved in banking transactions and bring out in their audits? KPMG should be sued not just by investors but also by regulators.

[paulalbert]

I'll comment here on FRC.
This is not the first time the "Morgans" have rescued the system.
Before the FED, J. Pierpont Morgan over 100 years ago rescued the banking system because the U.S. government was unable to do so on its own.
Banking is a risky business: With a normal yield curve to create net interest income you borrow short at very low cost ( demand deposits ) and lend longer ( duration risk and also credit risk ). ( "Financial Intermediation" ). Fees also contribute to the revenue side, but fixed costs ( branches, ATM machines, personnel, etc. ) are the expense side. Without high leverage and taking some duration, interest rate, credit and liquidity risk the profitability and return on equity of the banks would be minimal.
The current crisis is a combination of solvency ( rate rises impairing asset values ) and liquidity ( depositors fleeing to get better returns elsewhere, disintermediation ) , the fundamental risk of the bank business model. Even the soundest bank, JPM included, cannot survive a RAPID and MASSIVE withdrawal of its demand deposits, but fortunately that is not likely to happen system wide, and the FED and other bodies are charged with providing liquidity and insuring some depositors. The whole system balances on the edge of a knife, but confidence based somewhat on lack of understanding keeps it working. Most retail investors probably do not understand that deposits are just a loan to the bank for which you are compensated by some transactional services but very little if any cash interest.

The more fundamental long term issue ( why does JPM need to step in ?) ( read some of Lyn Alden Schwartzer's cogent analysis ) is the entities that really are insolvent are the FED, FDIC, etc. and U.S. Government.

[Big Tex 6988]

Privatize the gains and socialize the losses. The Dukes of Moral Hazard are at it again.

[Djreef1966]

Man, I sure am glad that this problem is now completely solved and we’ll never have to deal with anything like this ever again.

[mike962649]

Ultimately it is Wall Street Welfare, 13 or 14 years of near O% interest rates and trillions upon trillions of QE in every form that began during the 08/09 crisis, and never stopped until last year. This is the root cause of all of this. Then add in the 4-6 trillion (estimate) spent for 2 failed wars under Bush 2, Obama's 9 trillion, and Trump's 8 trillion, and here we are.

[mike962649]

@mike962649 and of course Biden's outrageous spending spree.

[Elons Mum]

@mike962649 but not nearly outrageous as Trump.

[taxxkiller]

JPM bought the assets at fire sale prices minus any liabilities they had to assume.
The good news is that JPM only made 2.6 Billion on the deal while
Wealthiest people on the plant got their unsecured deposits "secured"
Looks like bondholders, common stockholders, preferred shareholders get zero and
Taxpayer easily lost hundreds of Billions
and
This is just the beginning folks, not the end of bank failures.

[Happy Jack]

@taxxkiller tax payers didn’t lose anything

[taxxkiller]

@Happy Jack Of course they did.
"The FDIC will also enter into a loss-sharing agreement with JPMorgan (JPM) on single family, residential and commercial loans, and provide $50B in financing to the bank."
They are just giving 50B for starters.
Notice there are not details on anything
The bank is bankrupt FDIC takes over receivership
JPM comes to the rescue and makes 2.6 Billion on the deal and
FDIC forks over a $ 50Billion loan.
And you say no one takes a loss. Only 2 people in this deal is FDIC and JPM.
Guess who lost.

[Happy Jack]

@taxxkiller It works like this .....
1. The Fed prints and gives the money to the FDIC as needed.
2. The FDIC makes all deposits available to the uninsured depositors.
3. The FDIC then sells the assets of the banks, which they just did to JP
4. The difference between the cost of bailouts of the depositors and the proceeds from the asset sales is the actual amount the FDIC lost.
5. The FDIC charges other banks a “special assessment” to cover those losses, “as required by law.”
6. And it may then pay the Fed back with those funds it collected from other banks

[Guardian3981]

If JMP in "normal" times were to try to acquire First Republic the regulators most likely would not allow it. Now they can purchase them and be an even bigger bank.

[Chancer]

This deal suggests more undisclosed "hidden" losses for the FDIC fund.
Likely more bank dominoes to collapse.

[JDoe20]

What caused these latest bank failures? Could it be the high inflation that resulted from the uncontrolled Federal spending of the last 2 years?

[not_sure_68]

@JDoe20 Higher interest rates mostly. The banks are stuffed with low yielding paper and the sudden rate rise damaged the value of their assets. Something the fed apparently never imagined could happen...because we're all supposed to believe they're too stupid to understand the inverse relationship between yields and price.

Oh and behind the scenes commercial real estate debt is collapsing because massive quantities of useless office and retail space nobody wants, but that's still a secret we're not supposed to talk about until banksters figured out how to socialize those losses onto tax slaves.

[Chancer]

@JDoe20
Fed rate increases damaged long term bank investments at low rates with many banks losing 20%+ on those investments,.Fed FAILED to recognize the higher RISKS of reduced bank liquidity due to regulator incompetence, IMO; as they should have seen this coming as it was obvious.

[cons123]

@Chancer Mismanagement by the BOD and top executives are mostly to blame. Growth and market value in executive compensation plans make them take the risks with other people's money. How many executives or directors have gone to jail on the past misdeeds in financial crises for not following prudent financial and sound concepts?

[not_sure_68]

...and the fact that it's illegal for JPMorgue to acquire FRC? Meh...laws are for little people. That's the second part of Dodd-Frank tossed in the crapper since this controlled demolition of the banking industry began. What happened to "bail-ins" are the law now? Oh right, that doesn't count when billionaire political campaign contributors stand to get clipped because they were too stupid to understand banking laws.

"What is the section 622 of the Dodd-Frank Act?
Section 622 establishes a financial sector concentration limit that generally prohibits a financial company from merging or consolidating with, or acquiring, another company if the resulting company's liabilities upon consummation would exceed 10 percent of the aggregate liabilities of all financial companies.Nov 14, 2014"

www.federalregister.gov/...

[Non-GAAP Earnings]

@not_sure_68 This is from the link that you posted:

>D. Exceptions to the Concentration Limit

The statute exempts three types of acquisitions from the concentration limit: (i) An acquisition of a bank in default or in danger of default; (ii) an acquisition with respect to which the FDIC provides assistance under section 13(c) of the Federal Deposit Insurance Act; and (iii) an acquisition that would result only in a de minimis increase in the liabilities of the financial company.[29]

Under the statute, each of these types of transactions requires prior written consent of the Board.

[not_sure_68]

@Non-GAAP Earnings Yes I'm aware how US "laws" are written to continuously allow some entities to completely disregard US "law". Hey lets get rid of Glass-Steagall, because won't that be fun! Banks should be casinos after all. Hey lets make Dodd-Frank the new watered down Glass-Steagall so that we can conveniently ignore each and every part of it the second it becomes inconvenient.

$100k in depositor insurance...nah, $250k! Hey wait some stupid billionaires lost money? ...and they contributed to the uni-party campaign fund?!? ZOMG, lets make them whole and never mind deposit insurance limits or Dodd-Frank bail-in legislation. This is an emergency...some wealthy Chinese billionaires stand to lose a nickel!

How does any of this help with the "too big to fail" problem? How does making the largest bank in the world even larger by wiping out equity holders and handing JPMorgue more assets for a paltry $10.6b plus loan guarantees on crumbling real estate debt? How the hell can these so called "regulators" even pretend they're anything other than shills for the banking industry at this point?

[Non-GAAP Earnings]

@not_sure_68 If you study what the FDIC actually does, typically they get a suitor to assume the deposits of a failed bank. This way they avoid having to tap into their insurance fund and ultimately, going to taxpayers. There are over 4,000 banks in the US, and anyone else could have bid on FRC's deposits. JPM won the auction. Maybe because their costs are lower than other bidders. Or maybe because they got some sort of sweetheart deal. Either way, you can always just buy $JPM and profit from it yourself.

[BillFenn]

I wonder how this will affect my recent investment in BAC? Just a few hundred shares which I considered mostly a gamble, not an investment.

[User 56870315]

I'm out of US banks .,.. FDIC can do anything without consequences - first FDIC said that everything is fine ... I bought FRC ... and now they did this

Bye US bank system

[bklieb1]

@LongStockHunter the FDIC is there to insure depositors not shareholders. You bet on black and it was red.

[JDoe20]

@LongStockHunter
Perhaps you should be out of individual stocks and into mutual funds.

[not_sure_68]

@JDoe20 ...or move to a country that practices capitalism...or has regulators that don't wipe their ass with US law the second it becomes convenient for them to do so.

Bail ins? lol what's that? Dodd-Frank prohibits this merger? Ah...screw that, we love too big to fails getting bigger!

[cons123]

I think JPM deal for FRC is near neutral economically but having the additional branch banks and the access to their wealthy clients will eventually be a big positive. It makes JPM a major bank on the west coast. No doubt, the FDIC twisted JPM's arm to make a bid. PNC and Citizen's would have struggle to make this acquisition and could have been adversely affected with the combination. I am sure Senators Warren and Sanders are delighted. This is not a risk-free transaction, in my opinion.

[MadisonAv]

@cons123 80% loss coverage on residential and commercial RE. Reads like yet another sweetheart deal to me.

[dmaroz]

@MadisonAv

exactly. this is not Jamie Dimon's first rodeo and they know how to play this game. I don't think if it is going to make a big impact either way. With loss share agreement downside is limited and wealthy clients have already been poached by others. hard to say how many will stay with JPM

[not_sure_68]

@MadisonAv Too big to fail and too big to jail. Gee, I thought Dodd-Frank covered this, but apparently treasury doesn't do pesky laws anymore.