RIP First Republic

Here's what First Republic's crash means for you.

I think it’s time to talk about First Republic, don’t you?

The big headline of the week, of course, is that First Republic Bank was pronounced dead and JPMorgan Chase bought the bank’s $92 billion deposits and $203 billion in loans and other securities. When I think about how this unfolded, I have this little daydream— it goes like this: do you have an ex saved in your phone as “Nope” or “Do Not Answer”? Well, because of JP Morgan Chase CEO Jamie Dimon’s debacle in 2008 with Bear Stearns, I picture his phone ringing with First Republic’s contact changed to “Do Not Answer.”

But, he finally caved and picked up the call from First Republic this weekend. More on Bear Stearns and First Republic in a minute, but for a quick fun-fact: bailing out banks is one of the long-standing legacies of JP Morgan, and I’m talking about the man here, not the bank. This legacy goes back to a series of bank runs known as the Panic of 1907. To stop the financial system from collapsing, JP Morgan, again, the guy, invited all the financial heavyweights in New York City to his office, and— I’m dead serious here— JP Morgan locked them in his office, and forced them to pool together $25 million to prop up the financial system. And it worked! He released them in the morning, the financial system was saved and the panic of 1907 ended.

So, net-net JP Morgan, the man and the company, has a history of stepping in to help act as a backstop to the American economy. So when in 2008 JPMorgan Chase, led by Jamie Dimon, bought a failing Bear Stearns to save the baking system, Dimon was just bringing a long-standing tradition into a new century. At the time, the purchase of Bear Stearns was viewed as a brilliant business move. Dimon negotiated a deal to pay $2 a share for the company, which had been trading at $170 a year prior. And while Bear Stearns came with a lot of risk because many of its assets were subprime mortgages, the Federal Reserve agreed to insulate JPMorgan Chase from some of those risks.

But, alas, the deal was doomed… and while the bail-out may have mitigated some of the impact of the subprime mortgage crash, it didn’t prevent the Great Recession. Worse yet, the Bear Stearns deal came with a lot more legal risk than JPMorgan had accounted for. Even seemingly simple things, like selling the Bear Stearns office for 1.1. billion, landed JPMorgan Chase in court. Jamie Dimon has said repeatedly that he regrets buying Bear Stearns and wouldn’t do it again. In fact, he’s gone so far as to say he doesn’t even think the board of JPMorgan Chase would let him take the call about buying a failed bank.

Well, the board must have been sleeping this weekend because Jamie Dimon and JPMorgan Chase have done it again and purchased a failed bank: this time, First Republic. To be fair, he tried to resist. Dimon led a group of bankers who deposited $30 billion in First Republic to try to keep it solvent. No word on if he had to lock them in his office to get them to do it like JP Morgan did in 1907… But, that $30 billion wasn’t enough to keep First Republic solvent.

Wait… what?

$30 billion is a lot of cash… why wasn’t that enough to save First Republic?

As we know, when Silicon Valley Bank crashed, there was a panic that transcended SVB and infected other banks, and really, the industry as a whole.

First Republic had a unique reputation of being the bank of choice of very high-net-worth customers who enjoyed First Republic’s customer service. But despite the story of happy customers at First Republic, the bank’s financial filings revealed that even with the $30 billion boost, clients had been steadily withdrawing their deposits. Ultimately $102 billion flowed out of First Republic. This made First Republic’s position even more precarious. Like SVB, they had a lot of assets, like bonds, that were premature and essentially not ready to sell for a good return. To make matters worse, First Republic also had a lot of loans out to their high-net-worth customers. These were largely in the form of low-interest rate mortgages, which didn’t require payments toward the principal for several years. In terms of risk profile, these loans are sort of the opposite of subprime mortgages. It’s reasonable to expect that the uber-wealthy clientele of First Republic will pay these loans back, but it’s going to be 30 years before they do… and much like the treasuries First Republic invested in, these loans would sell for far less than their face value.

So, First Republic had some assets that were also kind of liabilities. But it also had other assets like physical banks, a trained workforce with established relationships with clients, and a company culture that its customers seem to like. Altogether, the assets were valued at $186 billion. Which, hello… duh… is a lot of money. So, finding a buyer was going to be difficult.

But, after going over the books and bidding against other banks, JPMorgan bought First Republic Bank for $182 billion… which is a bit of a discount, but not a huge one. The FDIC has also agreed to help assume some of the risk for the loans First Republic made, which, given the nature of these loans, isn’t actually that much of a risk. And the FDIC loaned JPMorgan $50 billion to make the purchase. You may be wondering why JPMorgan would need a loan. They do have the cash. But as a bank, they need to keep a set amount of cash on hand in case of a bank run… that’s one of the issues that got us into this whole SVB-First Republic mess in the first place. And actually, by helping to guarantee those loans, the FDIC is further helping JPMorgan adhere to banking regulations about capitalization. Right now this looks like a good deal for JPMorgan. But at the time so did Bear Stearns… But², First Republic isn’t facing the kinds of legal issues that cost JP Morgan so much money on the Bear Stearns deal.

So, if you’re a nerd like me, you think this stuff is interesting. But you also might be thinking: cool, good for Jamie Dimon, but what does this mean for me? Totally fair. So, if you have a First Republic account or mortgage or stocks— what happens now? Well, if you are a First Republic Bank customer - congratulations! You are now a JPMorgan Chase customer. All First Republic branches will become JPMorgan Chase branches. The FDIC has actually had a fair amount of practice with this after last month and so corporate leadership is optimistic there shouldn’t be any major issues. So, I’d expect the growing pains of a fairly sizable transition, but you should be able to continue banking as normal, and please pay that mortgage on time. For the homeowners out there, what I would do is get on the phone with a human, or go to a physical JPMorgan branch, and confirm the instructions for paying your mortgage throughout this transition. I know it’s 2023 and we don’t want to talk to humans anymore, but the last thing you want is to accidentally pay using the wrong instructions and take a credit score hit.

So, if you had stock in First Republic, the transition will also be smooth. You now own… nothing. And there’s no way to sugar-coat it: it sucks. When trading was halted on Monday, the stock, along with First Republic, basically stopped existing. Interestingly, it seems like most brokers allowed users to exercise their put options. Nictionary note here: put options are a type of financial asset that allows you to make money when a stock’s price drops. However, Robinhood, in a move that’s pretty on-brand, is being accused of forcing users to allow their put options to expire worthless. The lawsuits are sure to follow.

And even if you aren’t invested in First Republic, if you invest in anything, yesterday was probably a tough day for you. The market decided that it actually hated the news about First Republic and dropped across the board. But not only that, stocks of several regional banks like Comerica and Zion dropped significantly. The hardest hit banks were Western Alliance Bank and PacWest Bancorp— their stocks dropped so quickly that trading was actually halted on those company’s stocks to keep them from going into freefall. That does not mean they will be the next to fail, or even that any more banks will fail. However, trading on First Republic’s stock was halted in April in an attempt to stabilize the price. I never want to unduly panic anyone, but if you bank with any of these companies, it’s probably worth making sure that your deposits are under the $250,000 limit protected by the FDIC.


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