Sweetheart Deal
On April 29, I wrote No Buyer for First Republic Bank at Any Price, Here’s Why
My post did not include loss guarantees, $50 billion in financing, or refunded deposits.
I should have said, “No Buyer at a Fair Market Price”.
But the Run on First Republic continued, and the Fed needed a buyer. And so here we are.
An Invite You Cannot Refuse
“Our government invited us and others to step up, and we did,” JPMorgan Chief Executive Jamie Dimon said Monday.
Invited or told? Given the guarantees, what’s the difference?
First Republic Bank Is Seized, Sold to JPMorgan in Second-Largest U.S. Bank Failure
The Wall Street Journal reports First Republic Bank Is Seized, Sold to JPMorgan in Second-Largest U.S. Bank Failure
JPMorgan said it will assume all of First Republic’s $92 billion in deposits—insured and uninsured. It is also buying most of the bank’s assets, including about $173 billion in loans and $30 billion in securities.
As part of the agreement, the Federal Deposit Insurance Corp. will share losses with JPMorgan on First Republic’s loans. The agency estimated that its insurance fund would take a hit of $13 billion in the deal. JPMorgan also said it would receive $50 billion in financing from the FDIC.
San Francisco-based First Republic, the second-largest bank to fail in U.S. history, lost $100 billion in deposits in a March run following the collapse of fellow Bay Area lender Silicon Valley Bank. It limped along for weeks after a group of America’s biggest banks came to its rescue with a $30 billion deposit. Those deposits will be repaid after the deal closes, JPMorgan said.
The deal means JPMorgan, the largest bank in the U.S., is poised to emerge from the current crisis even bigger. The lender has said it got about $50 billion in new deposits from panicky customers looking to move their money to a too-big-to-fail bank following March’s failures. JPMorgan had $2.4 trillion in deposits at the end of the first quarter.
Both First Republic and Washington Mutual are now substantially owned by JPMorgan. First Republic’s 84 branches will reopen as part of JPMorgan Monday during normal business hours, and customers will have full access to their deposits, the FDIC said.
The Big Get Bigger
Allegedly there was a competitive auction but the FDIC said it went with the offer that it projected to cost the deposit-insurance fund the least.
Of course, JPMorgan would cost the FDIC the least given everyone knows the Fed would never allow it to fail.
Then again, the FDIC did not go with the best offer for Silicon Valley Bank because Elizabeth Warren and others did not want the big to get bigger.
Also, we do not know details of those other supposedly competitive offers. Nor do we have details of that $50 billion in financing.
Picking Winners and Losers
In this odious process, the Fed seems to be picking winners and losers.
Why not just guarantee every bank and be done with it?
The Fed won’t say that, but I suspect that is precisely what just happened.
This post originated at MishTalk.Com
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Mish
Equity: JPMorgan is getting about $186 billion of assets for about $182.6 billion ($122 billion of assumed liabilities, plus $10.6 billion in cash, plus $50 billion borrowed from the FDIC), meaning that it will have about a $3.4 billion equity cushion against these assets.
JPMorgan was the highest bidder – Bloomberg reports that its bid “was more appealing for the agency than the competing bids, which proposed breaking up First Republic or would have required complex financial arrangements to fund its $100 billion of mortgages.” And this is a pretty high bid: JPMorgan is paying $182.6 billion, total, in cash and assumed liabilities, for a bank with about $180 billion of loans and bonds at their current fair value; it is paying a bit extra for the other assets and the intangible value of the First Republic franchise. Still, it is acquiring the total package of assets for less than they are worth. ByMatt Levine Bloomberg May 1, 2023 at 11:35 AM MST
The O/N RRP turns inside money into outside money. Contrary to
the FED’s spurious accounting, re: “the bond underlying the repo transaction is
still recorded on the Fed balance sheet”, O/N RRPs are contractionary.
That, of course, is an accounting error according to the Federal
Reserve Bank of Chicago’s “Modern Money Mechanics”. “If the buyer of a reverse
repo or a security sold by the Fed is a nonbank (which 90% of RRPs are), and
pays for the purchase using its bank account, the money supply is directly
affected”.
Anyone going to jail for bankrupting First Republic? Silly me. It’s easier to find a herd of unicorns grazing in a field of four leaf clovers than to find responsible corporate leaders and politicians in the hoosegow.
the FDIC will have to increase the annual assessment rates for all
member banks and perhaps even require a one-time “special assessment” to
bring the fund’s reserves up to the level necessary to cover all
deposits.
Be careful, they are guaranteed until they are not…