In the end, after weeks of uncertainty and a final round of talks that dragged through the night, the fate of First Republic came down to JPMorgan Chase.
Jamie Dimon’s Wall Street institution had been central to discussions about the distressed California lender since First Republic emerged as a weak spot in the banking sector this year. Within the space of two months, JPMorgan turned from First Republic adviser to depositor to buyer.
Ultimately it edged out bids from rival banks in an auction run by federal regulators over the weekend and into the early hours of Monday morning. Its decision to step in brought a mostly private solution to the second-largest bank failure in US history — and relief to the Biden administration.
The First Republic deal was different from the structures agreed for Silicon Valley Bank and Signature Bank, the two lenders that collapsed in early March, but similar in that it was another ad hoc solution to the sector’s problems.
All deposits were taken over by JPMorgan, which meant the US government did not have to declare the bank a “systemic risk” to protect deposits over the $250,000 guarantee limit.
At the same time, JPMorgan secured a loss-sharing agreement with federal regulators to avoid any hit from the most problematic loans on First Republic’s books, a crucial sweetener for the buyer.
And although top Biden administration officials played a less prominent role in the negotiations than in the failure of SVB, the deal came together after heated discussions between Washington and Wall Street.
The US Treasury said early on Monday it was “encouraged” that the transaction minimised costs for the Federal Deposit Insurance Fund “and in a manner that protected all depositors”.
It added that the banking system was “sound and resilient”, that deposits were safe and that Americans should remain confident that it could “fulfil its essential function of providing credit to businesses and families”.
San Francisco-based First Republic had been hanging by a thread for weeks, ever since the March 10 collapse of Silicon Valley Bank in nearby Santa Clara, California focused attention on banks that relied on low-cost, uninsured deposits and had extensive paper losses on long-dated assets because of rising interest rates.
Credit rating agencies repeatedly downgraded First Republic and the share price fell more than 90 per cent.
But the situation became more acute, and First Republic’s fate as a freestanding institution was probably sealed last Monday, when it disclosed in first-quarter earnings that customers had pulled out over $100bn in deposits — more than double the $40bn analysts were expecting. Worse, deposits were still leaving the bank.
This was in contrast to other regional lenders that had been hit by outflows following the collapse of Silicon Valley Bank but were reporting that customers were coming back. Chief executive Michael Roffler further frightened investors by refusing to take questions on an analyst call.
By Tuesday morning, fears were mounting that First Republic would not be able to last the week without government support or some sort of strategic transaction — and the banks’ advisers were scrambling to find a solution to keep it operating. One proposal would have involved larger banks buying some of its assets at above market prices.
But the larger banks were reluctant to absorb losses without some kind of government backing that would help First Republic survive further pressure. By Wednesday, the Federal Deposit Insurance Corporation was asking roughly a dozen banks for informal bids, including what buyers would be willing to pay for First Republic’s deposits and assets, and what level of losses the FDIC would have to absorb to get the deal done, according to people familiar with the discussions.
At First Republic, there was still some optimism that the bank could escape being shut down, and the bank stepped up its efforts to bring the Biden administration on board. It had a small handful of advisers who had worked closely with Barack Obama in the hope that this would give it more influence with the current administration. Among them were Jim Messina, Obama’s re-election campaign manager in 2012. Also involved was Peter Orszag, who was the head of the Office of Management and Budget during the first Obama administration, and now the head of the financial advisory business at Lazard, First Republic’s financial adviser.
On Thursday the Financial Times reported that JPMorgan, which had been acting as First Republic’s banker, was involved in the negotiations to find a way to take over the ailing bank and prevent it having to enter resolution. A person involved in the negotiation said it became clear that Dimon was emerging as a central figure in any plan aimed at securing depositors’ savings.
But Biden administration officials were still sceptical that First Republic could avoid being shut down. “Officials have had a pretty clear-eyed picture of the likely course of events for some time now and regulators gave plenty of time to present a viable path forward,” said one.
In a briefing on Thursday afternoon Karine Jean-Pierre, the White House press secretary, did not commit to any action but suggested the government was ready to intervene if necessary.
Throughout the banking turmoil, top Biden officials have tried to stick to a few key priorities: avoiding contagion to the US economy, minimising the risk to taxpayers and protecting depositors rather than shareholders or debtholders.
But they have wanted to avoid any perception that they were eager to engage in a series of multibillion-dollar bailouts of struggling banks. “We have used important tools to quickly stabilise the banking system. We could use those tools again if needed,” Jean-Pierre said. “Certainly, we are monitoring this situation.”
By Friday, any optimism that First Republic could avoid FDIC seizure had faded, amid growing recriminations. First Republic’s advisers felt key figures in Washington, including at the Federal Reserve and Treasury, had never put their whole weight behind a deal that would have allowed the bank to remain independent, according to two people familiar with the negotiations. The Fed and the Treasury declined to comment.
But at the same time, the final stage of the talks — about what to do with the bank once it was taken over by regulators — kicked into high gear.
One person familiar with the talks set out the crux of the issue: First Republic wanted to stay open, JPMorgan and other prospective buyers wanted the FDIC to step in before any takeover, and the administration would only consider shutting down the lender when it was obvious there was no other solution.
Increasingly, First Republic and its advisers felt they were being edged out of the negotiations. Soon they found themselves on the sidelines, watching as the government and potential bidders decided First Republic’s fate.
The FDIC opened a data room for the most viable bidders and set a goal of identifying a buyer by Sunday afternoon, so the situation could be resolved before the markets opened on Monday.
Guggenheim Securities, acting as the FDIC’s financial adviser, contacted a handful of private equity firms, who were told they too should get to work preparing bids.
JPMorgan withdrew as an adviser to First Republic, paving the way for more than 800 of its employees to work around the clock over the weekend going through the struggling bank’s books.
The Biden administration had a less hands-on role than with SVB and Signature, insisting regulators at the FDIC were in charge. But key figures including Treasury secretary Janet Yellen, National Economic Council director Lael Brainard, and White House chief of staff Jeff Zients were closely following developments.
And as JPMorgan emerged as a frontrunner over the weekend, one person familiar with the negotiations said Dimon had a “direct line” to Biden through his contacts in Washington.
As the vetting process progressed, officials became confident that one bank, and perhaps as many as five, would make bids.
Such an outcome was their preference: the administration figured there would be less political fallout from offering assistance to another bank as part of a deal, than if First Republic ended up with a private equity buyer.
Nevertheless, the prospect of big banks hoovering up smaller lenders as turbulence spread across the financial system has been a political flashpoint since March.
Republican lawmakers accused the FDIC last month of neglecting prospective buyers for SVB, questioning whether a bias against bigger institutions was partly why no private-sector solution emerged — a suggestion FDIC chair Martin Gruenberg vehemently denied. But by Sunday, antitrust considerations had become less important, at least for the moment.
“The FDIC needs to look at the lowest-cost alternative, that’s their mandate,” Ro Khanna, a Democratic congressman from California, told CBS News when asked whether big banks should be blocked from acquiring the lender.
But Ian Katz at Capital Alpha Partners has warned that as the dust settles, political opposition to the deal is likely to mount. “The cost to the federal bank regulators . . . will go beyond the dollar figures,” he said. “JPMorgan never would have received regulatory approval to purchase a healthy bank of First Republic’s size. JPM will now get bigger due to its role of saviour of last resort.”
Regulators are also likely to accelerate efforts to shore up the banking system with stricter rules, said Jaret Seiberg, a managing director at Cowen Group. Michael Barr, the Fed’s vice-chair for supervision, has already signalled a tougher stance after recent banking failures.
Getting the First Republic seizure and takeover over the finish line was still no easy feat. By midday on Sunday, two banks that were thought to be interested, Bank of America and US Bancorp, dropped out of the bidding process. That left three — JPMorgan, PNC and Citizens — in the running.
After initial bids were deemed insufficient, the FDIC on Sunday asked banks to resubmit their offers later in the day, triggering the all-night rush to finalise the solution. Just after 3:20am Washington time on Monday, the FDIC said it had a deal.
In the aftermath of that announcement Dimon struck a defiant tone, rejecting criticism that the country’s largest bank had become too powerful.
“We have capabilities to help our clients who happen to be cities, schools, states, hospitals, governments,” he said on Monday. “We bank countries and we bank the IMF, we bank the World Bank. You need large successful banks.
“And anyone who thinks that it would be good for the United States of America not to have that should call me directly.”