Privatize Gains, Socialize Losses
You may have heard that Jamie Dimon’s gigantic whale of a bank JP Morgan Chase swallowed what was left of First Republic Bank, a bank that once traded for $220 per share. While combing through the Federal Reserve’s balance sheet Wolf Richter noticed the line item Loans to FDIC: +$58 billion in the week, to $228 billion.
JP Morgan acquired the assets of First Republic from the FDIC, paying the deposit insurer $182 billion for those assets. Richter lays out how the payment was made.
$10.6 billion in cash.
$92.4 billion by taking on the deposits (liabilities) that are owed to the depositors of First Republic.
$28 billion by taking on the advances First Republic had gotten from Federal Home Loan Banks (FHLB), and which JPM now has to pay off.
$50 billion loan from the FDIC.
That last boldfaced item is “$50 loan from the FDIC.” The deposit insurer doesn’t have that kind of money. The FDIC borrowed it from the Fed (which doesn’t have it either but can conjure it up out of thin air) to lend to JP Morgan Chase. JPM then paid off the $30 billion it and the other 10 big banks placed on deposit as First Republic was circling the drain.
JP Morgan paid some cash down ($10.6 billion), plus it assumed a boatload of deposit liabilities. Some of those deposits will stay with JPM some will leave. That cost is likely overstated. Next, Mr. Dimon went to the Federal Home Loan Bank (FHLB) (we used to call it FLUB) and borrowed $28 billion likely secured by First Republic loans it received in the deal. The terms on FLHB deals are breathtakingly generous so while Richter thinks some of the $50 billion will pay back the $28 billion FHLB advance, I don’t see why Dimon would do that.
The $50 billion loan from the FDIC will have to be paid back over five years.
Of course, that’s not all. Richter explains, “The FDIC also entered into a loss-share agreement with JP Morgan under which the FDIC will share in the losses and potential recoveries on the single family, residential, and commercial loans that JP Morgan purchased from the FDIC’s pile that was First Republic Bank.”
The loss to the FDIC is $13 billion. A pretty good weekend of work.
However, FDIC Board Member Jonathan McKernan made a stinging statement where in conclusion he wrote,
“More work remains to be done. We should avoid the temptation to pile on yet more prescriptive regulation or otherwise push responsible risk taking out of the banking system. Instead, we should acknowledge that bank failures are inevitable in a dynamic and innovative financial system.
“We should plan for those bank failures by focusing on strong capital requirements and an effective resolution framework as our best hope for eventually ending our country’s bailout culture that privatizes gains while socializing losses.”
