The slow collapse of First Republic Bank has a resolution and it’s Jamie Dimon, acting like the original John Pierpont Morgan, to the rescue again. The chief executive of JPMorgan Chase & Co won a weekend auction to pick up most of the assets and liabilities of the failed bank.
But this is not an act of altruism. After what seemed like an extended game of chicken between the US Federal Deposit Insurance Corp and private sector banks over the past week, the deal came through only with significant financial backing for the buyer. It was the FDIC that blinked.
Still, this is no gift to Dimon’s bank. JPMorgan won what both sides called a “highly competitive bidding process”. According to Bloomberg News, Pittsburgh-based PNC Financial Services was a competing bidder, with backing from Apollo Global Management and BlackRock. At closing, JPMorgan will book a profit of just $2.6. billion, most of which will eat up to $2 billion in restructuring costs expected over the next two years. The remainder qualifies as a rounding error on JPMorgan’s book value.
First Republic could never have been purchased in a private sale: the loss of immediate fair value was too great for any buyer on the bank’s primarily fixed-rate, interest-only mortgage. JPMorgan is writing down about $22 billion of its entire $173 billion book in commercial loans and residential mortgages as it takes them on its books.
Key to getting the deal done was to take out the billions of dollars in liabilities that remain with the FDIC, many of which will be zeroed out. These include $18 billion of shareholder equity, including $3.6 billion of preferred shares; another $800 million in subordinated bonds; and a few tens of billions in short-term funding from the Federal Reserve and other sources.
After asset write-downs and ditched liabilities, JPMorgan is buying $185.8 billion in assets, mostly debt, as well as $30 billion in cash and bonds. It is taking on $167.8 billion in liabilities, most significantly $90 billion in deposits, many of which are still insured by the FDIC. It has assets over liabilities of $18 billion, for which JPMorgan will pay $10.6 billion to the FDIC. It will also cancel $5 billion in deposits made to First Republic as part of a $30 billion life-support package that 11 banks put together in March. Other big banks will get their deposits back.
The FDIC will also cover 80% of any credit losses JPMorgan incurs on buy-to-buy loans for the first seven years for mortgages and five years for commercial loans. This is pretty standard in FDIC sales, although according to a Q&A on the FDIC website the cover usually lasts longer.
First Republic’s mortgages are primarily for expensive homes bought by the very wealthy and had an average weighted loan-to-value of 59% at the end of last year. The bank had a history of limited credit losses on such loans, which makes FDIC loss cover seem like an extra level of support that JPMorgan doesn’t need. In fact, it aims to make the loans even less risky from the perspective of regulators, allowing JPMorgan to hold much less capital against them than it would otherwise.
The bank’s chief financial officer, Jeremy Barnum, told analysts that this regulatory helping hand has delivered returns on biddable assets. Many of these loans were offered at favorable rates to win over wealthy customers at a time when interest rates were much lower than they are today, which is part of the story of the First Republic’s decline.
Overall, the FDIC expects the First Republic clean-up to cost $13 billion, which was the lowest-cost outcome.
For JPMorgan, in addition to the small profit on the acquisition, it also expects to add $500 million in net income per year, although Barnum acknowledged on the analyst call that this was a conservative estimate – less than a third of what it had previously Is a republic made in 2022.
If JPMorgan can retain most of the failed bank’s rich clients and even win some back; And if it can turn those customers into the secure source of profits they were for First Republic, the lender may have scored a good deal — though it’s by no means a game changer.
JPMorgan has helped American banking stability by stepping in to take on First Republic’s depositors, and it’s good that it has the size and strength to do so. But it was still a commercial transaction. JPMorgan was not the only bidder and FDIC funds were still needed to complete the deal. Jamie Dimon’s role as rescuer should be applauded, but it shouldn’t loom large in the minds of politicians and policymakers as they begin a new round of debate about the regulatory response to this mini-banking crisis.
Paul J. Davis is a Bloomberg Opinion columnist covering banking and finance.
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