The embattled First Republic bank is no longer looking for a buyer as investment advisers and corporate leaders seek to repair the company’s balance sheet before a sale could go ahead, FOX Business has learned.
The decision to withdraw it, first reported on Tuesday’s The Claman Countdown, was made for a variety of reasons, according to people with direct knowledge of the matter. The bank has up to a $12 billion hole in its balance sheet from underwater investments and loan defaults in a rising interest rate environment, these people say.
Potential buyers would have to write off those losses, and several interested parties who have been eyeing the bank want assurances of government backing for them, they add. But the Biden administration rejects such a step; Treasury Department and Federal Deposit Insurance Corp. officials will only provide assistance in an emergency where the bank goes into receivership and equity is wiped out, as in the case of the ill-fated Silicon Valley and Signature banks.
As Fox Business reported, First Republic advisors are also considering a number of ways to fix First Republic’s balance sheet in preparation for a sale or potentially allow the bank to remain independent if no buyer is sane. This includes seeking additional capital from the federal government in exchange for bank warrants.
“The deep uncertainty surrounding the collateral for any type of property in a loan book is probably why First Republic has a hard time finding a buyer,” said Danielle DiMartino Booth, chief strategist at Quill Intelligence and former advisor to the Dallas Federal Reserve. “Loans that need to be rerated are subject to the interest rate, which will drastically reduce the value of the banks’ risk-free securities as well as the unknown losses associated with the underlying collateral of the loans.”
A spokesman for First Republic declined to comment. Federal Reserve and Treasury Department spokesmen did not immediately respond to requests for comment.
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Following the news, First Republic shares rose 3% on Wednesday despite falling over 88% over the past month.
Despite the limited support, the Biden administration has been criticized for its efforts to shore up the banking system, which may account for its reluctance to bail out the First Republic despite the possibility that its failure could cause other banks to fail in the coming months .
With Silicon Valley and Signature, the FDIC and Federal Reserve invoked a clause in federal bank laws that allowed officials to consider these banks “systemically important institutions.” As a result, after its collapse earlier this month, the FDIC was allowed to cover all deposits with the banks, even those above its $250,000 limit.
The move was controversial because most of the depositors weren’t small savers but rather Silicon Valley portfolio companies of venture capital and private equity firms — many of them donors to President Biden — that had deposits well in excess of $250,000.
The banking turmoil has largely hit mid-sized institutions, though First Republic is still one of the country’s largest banks, with assets of more than $200 billion. Mid-tier banks, like many retail investors trading risky meme stocks and crypto, enjoyed the Fed’s easy-money policy and the federal government’s massive fiscal spending. The companies did not lack capital to expand.
Deposits grew in the banking system, and to attract customers, banks began lending to riskier customers, such as unprofitable technology companies, and on more favorable terms.
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When inflation set in and the Fed tightened monetary policy with higher interest rates, the opposite happened. Meme stocks and crypto corrected and are now a long way off their highs. Meanwhile, early-stage VC firms faced tighter lending standards and struggled to turn a profit and repay earlier loans. IPOs dried up, meaning these companies could not raise equity and faced a liquidity crisis.
The banks themselves held capital in the form of government bonds and mortgage-backed securities, both of which were very interest rate sensitive. Then rumors about the health of such banks spread through their loan portfolios. Depositors pulled their money out of accounts, forcing banks to sell their underwater government bonds at a loss. As banks began dumping bonds at low prices, it prompted the rapid implosion of Silicon Valley and signature banks earlier in the month.
The Federal Banking Authority hopes the panic will subside with the emergency efforts. To help banks pay fleeing deposits and stay solvent, the Federal Reserve created a lending program; Banks receive the face value of their debt as a one-year loan instead of selling it at market price. Banking regulators are considering other measures, such as requesting congressional authority to cover all deposits, even those over $250,000.
The optimism may be misplaced, say bankers who have looked at the finances of the First Republic and other troubled institutions. They believe many banks face similar balance sheet problems when their loan portfolios are squeezed by declining real estate values and lower profits from corporate borrowers that have borrowed on very cheap terms. For example, Facebook founder and Meta CEO Mark Zuckerberg received a meager 1.5 percent fixed-rate mortgage on a $5.95 million loan to fund his five-bedroom Palo Alto mansion from First Republic. The so-called Fed Funds Rate or the base interest rate set by the Federal Reserve is currently 5%.
In an attempt to quell additional panic, several major banks, led by JP Morgan, launched a bailout of First Republic’s private sector, pouring $30 trillion in deposits into their coffers, which were withdrawn earlier this month were exhausted by depositors. Until recently, the group tried to deliver First Republic to a buyer. Interested parties included Goldman Sachs and former Treasury Secretary Steve Mnuchin’s private equity firm (neither of which responded to requests for comment).
But people close to JP Morgan’s efforts say no buyer was willing to close the deal without government compensation for losses.
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“The federal authorities were completely asleep at the wheel,” said Christopher Whalen. “The scale of the Fed’s quantitative easing coupled with rapidly rising interest rates, mixed with a handful of bad bets, caused these failures.”
Source : finance.yahoo.com