Insights into First Republic Bank’s $30 billion bailout

The $30 billion bailout of First Republic Bank began Tuesday with a series of phone calls between JPMorgan Chase CEO Jamie Dimon, Federal Reserve Chair Jerome Powell and Treasury Secretary Janet Yellen.

According to a person familiar with the events, Dimon was in Washington and wanted to discuss some issues involving bank capital. The topic soon turned to the fate of the country’s fourteenth largest bank.

Shares in the San Francisco lender had fallen since the Santa Clara-based Silicon Valley Bank collapsed last week $70 billion in funding from JPMorgan Chase and the Federal Reserve announced Sunday The night failed to ease the pressure earlier this week. The stock fell 62% on Monday.

The CEO of the country’s largest bank, the Fed chair and the Treasury Secretary began brainstorming, according to people familiar with the discussions, with input from another powerful regulator: Federal Deposit Insurance Corporation Chairman Martin Gruenberg. your idea? JPMorgan could give some deposits to First Republic.

Such an infusion could help solve a big problem. Withdrawals of deposits have squeezed Silicon Valley Bank and made it impossible to continue on its own. Last Thursday, customers withdrew $42 billion in just one day, leaving the bank with a negative cash balance, and regulators impounded the bank on Friday. The concern was that the same could happen to First Republic.

The next day, Dimon pitched this idea to some of his colleagues. At a Bank Policy Institute event, he reached out to other executives, including Citigroup CEO Jane Fraser, and pledges for $5 billion in uninsured deposits from Citigroup (C), Bank of America (BAC), and Wells Fargo soon followed (WFC). JPMorgan also agreed to contribute $5 billion.

JPMorgan Chase & Company Chairman and CEO Jamie Dimon will testify at a Senate Banking Committee hearing in 2022. (AP Photo/Jacquelyn Martin)

A $20 billion infusion was deemed sufficient, but these four banks decided to charge more from smaller rivals on Wednesday and Thursday. US Bancorp (USB), Truist (TFC), PNC (PNC), State Street (STT) and Bank of New York Mellon (BK) agreed to deposit $1 billion each. The last to follow were Goldman Sachs (GS) and Morgan Stanley (MS), according to people familiar with the events. They each agreed to deposit $2.5 billion.

“There has been a fair amount of deposits flowing into the big banks over the past five days,” said one of the people familiar with the deal. “It’s basically a capital revolution.”

The rescue attempt by one of the country’s largest regional lenders puts Dimon at the center of a national banking crisis for the second time in 15 years.

In 2008, he acted twice to help stabilize the financial system when JPMorgan Chase (JPM) bought New York investment bank Bear Stearns in March of that year and received $29 billion in backing from the federal government, and then in the September 2008 Washington Mutual in Seattle In the case of Washington Mutual, JPMorgan Chase bought its businesses after regulators seized Seattle thrift. It is still the nation’s largest banking collapse.

The two deals made JPMorgan Chase the largest coast-to-coast bank in the country and gave it an even more powerful hand on Wall Street. They also burdened it with years of legal and regulatory headaches. Dimon has said if he could do it again he would not have bought Bear Stearns for these reasons.

The $30 billion infusion announced Thursday boosted shares of First Republic, which ended the day up 10%. Powell, Yellen and Gruenberg said in a joint statement that “this statement of support from a group of large banks is very welcome and demonstrates the resilience of the banking system.”

According to a person familiar with the talks, JPMorgan will not receive any specific arrangements as part of this deal. “These deposits will be treated the same as anyone’s uninsured deposits,” said this person. Deposits must remain with First Republic for 120 days and earn interest at the same rate as current depositors.

“The selfish part,” this person added, “empowers the banking industry, which lifts all boats.”

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