When a package of emergency measures following the failure of Silicon Valley Bank failed to stop the plunge in US regional banking stocks this week, Washington’s officials turned to Jamie Dimon, the last remaining veteran of the 2008 banking crisis still heading a large lender.
Over multiple phone calls on Tuesday, US Treasury secretary Janet Yellen, Federal Reserve chair Jay Powell and JPMorgan Chase’s Dimon discussed the idea of bringing the nation’s biggest lenders together to help bolster confidence in the financial system, several people with knowledge of the conversations told the Financial Times.
The shares of First Republic, a California bank with some similarities to SVB, had been hit particularly hard amid fears that it would be forced to sell its mortgage portfolio at a steep loss to cover deposit outflows.
The “three Js”, drawing on advice from longtime banking lawyer Rodgin Cohen of Sullivan & Cromwell, tossed around the idea of shoring up First Republic with additional deposits, reducing the likelihood of a fire sale.
Dimon, the chief executive of JPMorgan Chase, which is an adviser to First Republic, enlisted his bankers to drum up support. By Wednesday morning, the nation’s three other largest lenders, Bank of America, Wells Fargo and Citigroup were on board. More video and phone calls followed, including a call involving close to a dozen chief executives, Yellen and top banking regulators. While JPMorgan bankers did the initial outreach, most of the conversations were chief executive to chief executive.
Dimon and Yellen then met in person in her Washington office to go over the details before a group of 11 banks announced on Thursday they had agreed to deposit $30bn into the beleaguered lender.
People party to the conversations or briefed on them insisted that regulators neither twisted arms nor made special promises to bring banks on board.
The deposits are receiving interest at the market rate and are too large to be covered by the Federal Deposit Insurance Corporation. That means the banks would be at risk of losing the money if First Republic failed, unless, as occurred in the case of SVB, federal regulators declare it to be systemically important.
“The officials were supportive and wanted it to work, but . . . we are not getting anything special,” an industry person briefed on the talks said. “We did not get a wink and a nod.”
“The government was well aware but this [plan] was created outside of government. It would have been tainted by the involvement of government,” said a person who participated in the discussions.
Most banks got on board quickly. “Stability and resiliency of the broader financial system is pretty high on our priority list. We thought it was the right thing to do,” said a person familiar with the discussions at one participating institution.
The bank contributions were largely linked to the size of their deposit bases, with the four big lenders putting in $5bn apiece and BNY Mellon, PNC, State Street, Truist and US Bank all putting in $1bn. Morgan Stanley and Goldman Sachs, which as investment banks have relatively small deposit bases, were among the last to join, but kicked in $2.5bn apiece to show support, two people said.
Participants were encouraged by the news that deposit outflows at First Republic had slowed. While it looked like the bank might be able to survive without help, “you can’t take that chance”, one of the people said.
There are historic precedents for co-operative industry solutions brokered or strongly encouraged by the government. When crashing stock markets destabilised banks and brokers in the panic of 1907, the financier John Pierpont Morgan called together the largest financiers of his day, literally locked them all in a room and forced them to devise a rescue plan. He was able to do this because the federal government stumped up more than $25mn in deposits to help shore up the banks.
In a similar vein, when the Long-Term Capital Management hedge fund collapsed in 1998, the New York Federal Reserve put together a $3.6bn rescue fund from contributions from its big Wall Street creditors.
The industry-led solution for First Republic drew praise from Patrick McHenry, the Republican chair of the House Financial Services Committee: “This is how our free market should operate. At a time of uncertainty, bank managers and supervisors must be laser-focused on controlling risk to bolster the stability and resiliency of our financial system.”
Tina Smith, a Democratic senator from Minnesota who sits on the Senate banking committee, applauded the solution brokered by the Biden administration. “It’s important to me that we don’t have taxpayer dollars bailing out the bad decisions,” at these banks, she told the FT.
Although the turmoil was not as bad as the financial crisis, “You want to prevent the flood, but if you’re in the middle of the flood you have to do what you can to stabilise the situation.”
Additional reporting by Stephen Gandel in New York