NEW YORK, May 2 (Portal) – On March 12, as several U.S. banks were rocked by a crisis of confidence, JPMorgan Chase & Co (JPM.N) put its power behind First Republic Bank and gave the troubled lender the what two sources said a $10 billion funding.
JPMorgan’s establishment did not prevent depositors from fleeing the lender. But it turned out to be the start of a series of events – some details of which are being reported here for the first time – that earned JPMorgan and its CEO Jamie Dimon a key role in one of the most extraordinary US bank bailouts in recent years.
JPMorgan bought First Republic in a government auction on Monday, prompting weeks of failed bailout attempts and broken discussions involving some of Wall Street’s most powerful executives and US officials. According to two sources familiar with the situation, deal talks were going to the end. Four bidders, including JPMorgan, made it into the final rounds of the auction Sunday night, one of the sources said.
JPMorgan didn’t know it had won until around 1:15 a.m. in New York, although final bids were initially due a few hours earlier. Late that night, as Dimon and other senior executives awaited the outcome of their bid, the silence from the Federal Deposit Insurance Corp (FDIC) led them to believe they lost, one of the sources said.
The final deal, announced around 3:30 a.m., cements Dimon’s reputation as one of Wall Street’s most powerful bankers.
But the deal also raised new questions about the dangers of banks that are too big to fail, the quality of regulatory oversight over the banking industry, and the Biden administration’s determination to prevent deals from making companies too powerful.
Analysts at Piper Sandler said the deal isn’t just about finances, but was significant for JPMorgan as it solidifies the bank “as a leading industry leader in times of turmoil.”
“The only concern we have is the current unknowable. Already a hugely important player, JPM has now managed to make itself even more important at a time when ‘too-big-to-fail’ is still a political concern.” They wrote.
Dimon has resisted any suggestion that his bank is getting too big.
“We have the capacity to serve our customers, which can be cities, schools, hospitals, governments; we are banks of the IMF, the World Bank,” the banker said on a post-deal conference call. “And anyone who thinks the United States shouldn’t have that can call me directly.”
The FDIC earlier Monday said the resolution involves a “highly competitive bidding process” and is the lowest-cost alternative for its deposit insurance fund.
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BANK CRISIS
First Republic was founded in 1985 by James “Jim” Herbert, son of a community banker in Ohio. The bank was bought by Merrill Lynch in 2007 just before the financial crisis. It became public again in 2010 after Merrill Lynch itself was bought by Bank of America Corp (BAC.N) and the new owner decided to divest it.
First Republic’s attraction was their wealthy customers, who gave them preferential interest rates on mortgages and loans. Its dependence on the wealthy also made it more vulnerable – it had high levels of uninsured deposits.
In early March, when a run on Silicon Valley Bank scared off depositors and investors and sent them into the arms of institutions they felt safer, First Republic quickly became a target. More than $100 billion fled in the first quarter, so it struggled to raise money.
Over the weekend of March 12, as regulators seized Silicon Valley Bank and Signature Bank and announced a series of contingency measures to boost confidence in the system, First Republic said it took additional steps to bring the total to $70 billion access US dollars in funds, including from JPMorgan.
The reassurance failed to calm markets, however, and First Republic shares fell again the following day.
Portal couldn’t pinpoint the timing, but at some point JPMorgan’s interest in First Republic grew beyond his role as an advisor helping the bank strengthen its finances. Part of its appeal: the lender’s list of high-net-worth individuals who would complement JPMorgan’s own private banking franchise.
However, the prevailing opinion at the time was that regulators would not allow JPMorgan to buy another bank. JPMorgan holds more than 10% of the country’s total bank deposits, and federal law prevents a large bank from making an acquisition that would take it above that threshold. Takeovers of failed banks can be exempted from the rule.
According to a source familiar with the matter, JPMorgan has started a process internally to explore various options for First Republic, including an acquisition. The deal was internally codenamed “Forest,” the source said.
The bench kept the teams separate, the source said. First Republic also had Lazard Ltd (LAZ.N) as an advisor.
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TOP BIDDER
In March, a number of bank bailout ideas were floated. Dimon was among power brokers discussing a package of major banks to inject $30 billion in deposits. When that failed to bolster confidence in the lender, Dimon was among the bankers who met in Washington for a forum that included working out details of what needed to be done. JPM proposed another idea that was briefly considered, which was to form a consortium to buy the bank, two sources previously said.
A major hurdle to a private sector deal, however, was that First Republic had billions of dollars in unrealized losses on its books that would need to be funded if someone bought the bank.
Over the weeks, regulators came close to pulling the plug on the bank at least once in late April, one of the sources said. The situation worsened last week after shares went into free fall following gains.
On Friday, the FDIC ruled the bank had run out of time to find a private solution, a source previously told Portal. On the advice of Guggenheim Securities, the regulator reached out to various potential bidders, including banks and private equity firms, to solicit bids, two sources familiar with the situation said.
By late Sunday, the race had narrowed to four bidders, a source said. In addition to JPMorgan, PNC Financial Services Group (PNC.N), Citizens Financial Group Inc (CFG.N) and Fifth Third Bancorp (FITB.O) were also involved in the auction, sources said.
The auction dragged on overnight as FDIC advisers evaluated each bid for merit, a source familiar with the matter said.
Each bidder submitted bids for the entire bank as well as a portion of its assets, the source said, and the FDIC advisors were looking for the one that would cost the deposit insurance fund the least.
JPMorgan deployed more than 800 employees to carefully review the bank. While the partial offers from the three other banks had some appeal in seeking a solution for First Republic, none could beat JPMorgan’s offer to buy the entire bank, one of the sources said.
Reporting by Anirban Sen, Nupur Anand, Isla Binnie, David French, Saeed Azhar, Lananh Nguyen; writing by Megan Davies; Edited by Paritosh Bansal and Stephen Coates
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