First Republic Count Down

Citizens Financial Group Inc (CFG.N), PNC Financial Services Group (PNC.N),  JPMorgan Chase & Co (JPM.N) and US Bancorp in NFL Draft parlance are “on the clock.” These banking white knights are thought to be among the bidders vying for the remaining carcass of First Republic Bank in an auction process being run by the Federal Deposit Insurance Corp, reports Reuters.

Reuters says, “A deal is expected to be announced on Sunday night before Asian markets open, with the regulator likely to say at the same time that it had seized the lender, three of the sources said. Bids are due by Sunday noon, one of the sources said.” 

“Unclear to some involved in the process is whether regulators might use a bid for a so-called open-market solution that avoids formally declaring First Republic a failure and seizing it,” Bloomberg reports. 

Bank analyst Chris Whalen tweets the hard facts. “Hello.  Bid is zero with a loss share agreement @FDICgov Haircut loan book 15%. Equity number is negative…”

Yes, the taxpayers will be the unwitting holders of First Republic’s bad assets, while one of the FDIC’s favored bidders gets the good stuff at a discount. Jamie Dimon’s J.P. Morgan already has ten percent of the nation’s deposits making that bank ineligible to pick up First Republic but don’t be surprised if Jamie receives a  “special government waiver” if he submits the winning bid. 

Mr. Dimon has been viewed as the fair haired banker for decades. Ex-FDIC Chair Sheila Bair, in her book Bull By The Horns, called Dimon “deeply experienced” and related a story when she served on a panel with Bill Clinton and Dimon with the JP Morgan CEO calling the FDIC “creditworthy” and “would be happy to lend [the FDIC] money anytime.” Writing about the WaMu failure Bair said, “If Chase had not acted, the FDIC would have suffered tens of billions of dollars in losses.”  The FDIC remembers. 

James "Jim" Herbert founded First Republic in 1985. Merrill Lynch acquired the bank in 2007, but after Merrill was purchased by Bank of America in the throes of the great financial crisis, BoA sold First Republic and the bank blossomed by luring high-net-worth customers with preferential rates on mortgages and loans. What came with those low loan rate products was uninsured deposits amounting to 68% of the bank’s total deposits.

As was the case with Silicon Valley Bank, First Republic saw more than $100 billion in deposits fleeing in the first quarter, leaving it scrambling to raise money.

Mr. Dimon’s bank, PNC and 9 other big banks made a 120-day deposit at FRC totaling $30 billion in March. It’s unclear if that deposit is insured (why should they be insured? Asks ZeroHedge), uninsured or could be converted into equity as a part of a bailout. This writer can’t believe Mr. Dimon would put up that kind of money uninsured. 

Former Treasury Secretary Lawrence Summers told Bloomberg Friday that he was “surprised and disappointed that this situation has continued to linger as long as it has.”

Sounding almost Rothbardian, Summers said “These are things like forest fires, it is much easier to prevent them than it is to contain them after they start to spread.”

Now First Republic is a political football: cover all the deposits or not. Jim Bianco tweets, 

“Don't bailout the uninsured depositors (who are also uninsured creditors) and most likely they take a loss. Yes, the 11 banks will lose, but so will any other uninsured depositor.

“If so, sit back and watch 41% of the US deposit base that is not insured (mainly businesses with deposits greater than $250k) try and get their deposits out of their “not-too-big-to-fail” bank and into one that is too-big-to-fail. Chaos in banking because Yellen reneged about protecting uninsured depositors 5 weeks after her promise to protect them.”

"If no business firm can be insured," Murray Rothbard wrote,

then an industry consisting of hundreds of insolvent firms is surely the last institution about which anyone can mention "insurance" with a straight face. "Deposit insurance" is simply a fraudulent racket, and a cruel one at that, since it may plunder the life savings and the money stock of the entire public.

If Jamie Dimon wants the First Republic, he’ll get it, on his terms. And the fraudulent racket will continue.