The “three J’s” who made a saving deal for the First Republic
When the emergency measures that followed the failure of Silicon Valley Bank failed to stem the slide in US regional bank stocks this week, Washington officials turned to Jamie Dimon, the last remaining veteran of the 2008 banking crisis still at the helm of a major lender.
US Treasury Secretary Janet Yellen, Federal Reserve Chairman Jay Powell and JPMorgan Chase’s Dimon discussed in several phone calls the coming together of the country’s largest lenders to strengthen confidence in the financial system. Financial Times.
Shares of First Republic, a California bank somewhat similar to SVB, were particularly hard hit by fears that it would have to sell its mortgage portfolio at steep losses to cover deposit outflows.
The “three Js,” relying on the advice of longtime banking lawyer Rodgin Cohen of Sullivan & Cromwell, floated the idea of backing First Republic with additional deposits, reducing the likelihood of a fire sale.
Dimon, the CEO of JPMorgan Chase, which is advising First Republic, asked bankers for support. By Wednesday morning, the nation’s three other largest lenders, Bank of America, Wells Fargo and Citigroup, were on board. More video and phone calls followed, including nearly a dozen CEOs, Yellen and key bank regulators. While JPMorgan bankers did the initial outreach, most of the conversations were CEO-CEO.
Dimon and Yellen then met in person at her Washington office to hammer out the details before a group of 11 banks announced Thursday that they had agreed to put $30 billion into the troubled lender.
People who participated in or were briefed on the talks insisted that regulators were not pulling any guns or making any special promises to get the banks involved.
Deposits earn interest at market rates and are too large to be covered by the Federal Deposit Insurance Corporation. That means the banks are exposed to losing money if First Republic fails, unless it is declared systemically important by federal regulators, as in the case of SVB.
“Officials were supportive and wanted it to work, but . . . we’re not getting anything special,” an industry insider said of the talks. “We didn’t get a wink or a nod.”
“The government knew it well, but this [plan] was established outside the government. It would have been tainted by government involvement,” said the person involved in the discussions.
Most banks joined quickly. “The stability and flexibility of the broader financial system is quite high on our priority list. We thought it was the right thing to do,” said a person familiar with the discussions at one of the participating institutions.
Bank contributions were largely tied to the size of their deposit bases: the Big Four lenders contributed $5 billion each, and BNY Mellon, PNC, State Street, Truist and US Bank each contributed $1 billion. Morgan Stanley and Goldman Sachs, which as investment banks have relatively small deposit bases, were among the last to join, but kicked in $2.5 billion each to signal their support, the two said.
Participants were encouraged by the news that deposit outflows had slowed at First Republic. While the bank appeared to be able to survive without help, “it shouldn’t be taking any chances,” one of the people said.
There are historical precedents for government-mediated or heavily supported cooperative industrial solutions. When the stock market crash destabilized banks and brokers during the Panic of 1907, financier John Pierpont Morgan called together the greatest money men of his day, literally locked them in a room, and forced them to come up with a rescue plan. It was able to do this because the federal government had accumulated more than $25 million in deposits to help shore up the banks.
Similarly, when the hedge fund Long-Term Capital Management collapsed in 1998, the New York Federal Reserve created a $3.6 billion bailout fund with contributions from big Wall Street lenders.
First Republic’s industry-led solution was praised by Patrick McHenry, Republican chairman of the House Financial Services Committee: “This is how our free market should work. In times of uncertainty, bank managers and supervisors must be laser-focused on controlling risk to strengthen the stability and resilience of our financial system.”
Senator Tina Smith, Democrat of Minnesota, a member of the Senate Banking Committee, welcomed the solution brokered by the Biden administration. “It’s important to me that there are no taxpayer dollars to bail out bad decisions,” he told the FT in these banks.
Although the turmoil was not as severe as the financial crisis, “The flood wants to stop it, but when you’re in the middle of the flood, you have to do everything you can to stabilize the situation.”
Additional reporting by Stephen Gandel in New York