2023-05-02 09:56:29
The purchase caps weeks of failed bailout attempts and aborted discussions involving some of Wall Street’s most powerful executives and US officials.
The crisis situation in the US banking system has resulted in another regional bank failing. This Monday the closing and sale of the assets of First Republic Bank was announced to JPMorgan Chase “to protect its depositors”. This occurs after knowing in the presentation of quarterly results the flight of deposits for a value of 102,000 million that had occurred. But, how was the purchase process and how was an agreement reached?
On March 12, as several US banks were reeling from a crisis of confidence, JPMorgan Chase threw all its might behind First Republic Bank, giving the troubled lender what two sources said was $10 billion in financing. JPMorgan’s facility did not stop depositors from fleeing the lender. But it turned out to be the beginning of a series of events that placed JPMorgan and its CEO, Jamie Dimon, in a pivotal role in one of the most extraordinary American bank bailouts in recent years, according to the Reuters agency.
JPMorgan bought First Republic at a government auction on Monday, capping weeks of failed bailout attempts and aborted discussions involving some of Wall Street’s most powerful executives and US officials. According to two sources familiar with the situation, the negotiations reached the end. Four bidders, including JPMorgan, reached the final rounds of the auction on Sunday night, one of the sources said.
JPMorgan did not know until after 1 a.m. in New York that he had won, even though the final bids were due several hours before. At one point in the evening, as Dimon and other top executives awaited the outcome of their offer, the silence from the Federal Deposit Insurance Corp (FDIC) made them think they had lost, one of the sources said.
The final deal, announced around 3:30 a.m., cements the reputation of Dimon as one of the most powerful bankers on Wall Street. But the deal also raised new questions about the dangers of having banks that are too big to fail, the quality of regulatory oversight of the banking industry, and the Biden administration’s determination to prevent corporations from becoming too powerful through agreements.
Piper Sandler analysts said the deal was significant for JPMorgan more than financials, as it cements the bank “as an industry leader in turbulent times.” “The only concern we have is the current unknown. JPM was already a very important player which has now become even more so at a time when ‘too big to fail’ remains a political concern,” they wrote.
Dimon rejected any suggestion that his bank is getting too big.. “We have the capacity to serve our clients, which can be cities, schools, hospitals, governments; we finance the IMF, the World Bank,” the banker said in a conference call after the deal. “And anyone who thinks the United States shouldn’t have that can call me directly.” The FDIC said earlier Monday that the resolution involved a “highly competitive bidding process” and that it was the least expensive alternative for its share insurance fund.
History of the regional bank
First Republic was founded in 1985 by James Herbert, son of an Ohio banker. the bank was purchased by Merrill Lynch in 2007, just before the financial crisis. It went public again in 2010, after Merrill Lynch itself was bought by Bank of America Corp and the new owner decided to divest it.
He The First Republic’s appeal was its wealthy clients, to which it offered preferential rates on mortgages and loans. His dependence on the rich also made him more vulnerable: he had a high level of uninsured deposits. In early March, when Silicon Valley Bank’s run on deposits scared depositors and investors into what they considered safer institutions, First Republic quickly became a target. In the first quarter, more than $100 billion fled, forcing him to scramble for money.
On the weekend of March 12, as regulators seized Silicon Valley Bank and Signature Bank and announced a series of emergency measures to shore up confidence in the system, First Republic said it had taken additional steps to access a total of 70,000 Millions of dollars in funds, including those from JPMorgan. The guarantee, however, failed to calm the markets, and First Republic shares fell again the next day.
At some point JPMorgan’s interest in First Republic grew into more than just its role as an adviser helping the bank bolster its finances. Part of its appeal: the lender’s list of wealthy people, which would be added to JPMorgan’s own private banking franchise.
However, the general opinion at the time was that regulators would not allow JPMorgan to buy another bank. JPMorgan owns more than 10% of the country’s total bank depositsand federal law prevents a large bank from making an acquisition that would put it above that threshold. Acquisitions of failed banks may be exempted from the rule.
JPMorgan has started an internal process in which several options for First Republic have been studied, including an acquisition, according to a source familiar with the matter. The operation was codenamed “Forest” internally, according to the source. The bank kept the teams separate, the source said. First Republic also had Lazard Ltd as adviser.
The best bidder
In March, a series of ideas were considered to save the bank. Dimon was among the power brokers who debated a package by big banks to inject $30 billion in deposits. After that failed to improve confidence in the lender, Dimon was among the bankers who gathered in Washington for a forum, where they discussed topics such as trying to nail down the details of what to do. JPM proposed another idea that was briefly considered, that of forming a consortium to buy the bank, two sources previously said.
A key hurdle to doing a private sector deal, however, was that there were billions of dollars of unrealized losses at First Republic, and they would have to be financed if someone bought the bank. As the weeks passed, regulators came close to shutting down the bank at least once in late April, according to one of the sources. The situation took a turn for the worse last week, after his stock took a free fall following the results.
On Friday, the FDIC decided that the bank’s time had run out to find a private solution, a source told Reuters. Advised by Guggenheim Securities, the regulator contacted several potential biddersincluding banks and venture capital firms, to solicit bids, two sources familiar with the situation said.
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By late Sunday, the race had narrowed to four bidders, according to one of the sources. In addition to JPMorgan, PNC Financial Services Group, Citizens Financial Group Inc y Fifth Third Bancorp they were also at the auction, sources have said. The auction went on all night as FDIC advisers vetted each offer on its merits, a source familiar with the matter said. Each bidder submitted bids for the entire bank as well as some of its assets, the source said, and FDIC advisers were looking for the one that would cost the deposit insurance fund the least.
JPMorgan deployed more than 800 employees to conduct due diligence on the bank. While the partial offers from the other three banks had some appeal in finding a solution for First Republic, none could beat JPMorgan’s proposal to buy the entire bank, one of the sources said.
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