May 2, 2023

First Republic Bank

Regulators seized troubled First Republic Bank early Monday, making it the second-largest bank failure in U.S. history, and promptly sold all of its deposits and most of its assets to JPMorgan Chase… First Republic’s 84 branches opened on Monday as branches of JPMorgan Chase, which acquired the bank’s $92 billion in deposits and $203 billion in loans and other securities. The bank’s shareholders are likely to be wiped out as part of the deal.” AP News

Here’s our coverage of the failure of Silicon Valley Bank. The Flip Side

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From the Left

The left blames the bank failure on risky business practices, and calls for more stringent regulation.

“First Republic was a rotten bank… Bloomberg reported that a cornerstone part of its business was giving out jumbo mortgages with paltry interest rates, some of them under 3 percent. Not only that, but borrowers didn’t have to pay back the principal for ten years. This was pure quid pro quo, a deal aimed only at the wealthiest and most powerful — Goldman Sachs president John Waldron was a borrower — in order to get them to park their cash there. These low-interest loans were part of what did in First Republic…

“If this all sounds familiar, it’s because it’s very similar to what to happened with Silicon Valley Bank. SVB also had a mismatch in its assets and liabilities. SVB was also giving sweet deals to executives in order to bring in easy cash… Of course, all banks do this to some extent. That’s why ‘private client’ services at Chase give better terms. But these were banks that had no buffer.”

Kevin T. Dugan, New York Magazine

“Five years ago this month, then President Donald Trump signed into law the so-called Economic Growth, Regulatory Relief and Consumer Protection Act… This legislation exempted community banks and regional banks from certain elements of the Dodd-Frank financial reform, which Congress passed in the wake of the financial crisis of 2007-09… The 2018 act ‘rolls back the crippling Dodd-Frank regulations that are crushing community banks and credit unions nationwide,’ Trump crowed, echoing the line of a well-funded bank lobby…

“[But SVB] wasn’t wasn’t a community bank, or a credit union, or any kind of ‘small financial institution.’ At the end of 2017, it had assets of $51.2 billion… [First Republic] in 2018 had $99.3 billion in assets. Nonetheless, they both qualified for substantially reduced regulation… [History] tells us that relaxing banking regulations at the request of bank executives and bank lobbyists is almost always a bad idea.”

John Cassidy, New Yorker

“The problems at Silicon Valley Bank and Signature Bank were not unknown to the Fed and the FDIC. Various commentators, including me, asked how government regulators could have missed them. It turns out they didn’t miss them; they aren’t stupid. Regulators flagged the problems to Silicon Valley Bank and Signature Bank and issued warnings. The trouble was that the banks didn’t take those warnings seriously and the regulators, knowing this, didn’t press the issue…

“Under Biden, deference toward the banking world is in retreat. But after four decades of sparing the rod and spoiling the child, it’s not going to vanish overnight. It’s past time for government to bring the financial sector to heel.”

Timothy Noah, New Republic

From the Right

The right blames the bank failure on risky business practices, but is skeptical of additional regulation.

The right blames the bank failure on risky business practices, but is skeptical of additional regulation.

“The main reason for First Republic’s failure was the long years of easy money. The bank developed a lucrative business issuing below-market mortgages to wealthy customers to attract their deposits. Nearly 60% of its loan book consisted of single-family mortgages, and most included teaser rates with an interest-only period…

“The business model worked until the Federal Reserve began raising interest rates, which dented the value of its loans and spurred customers to move deposits into higher-yielding money market funds and government bonds. During last month’s bank run, wealthy uninsured depositors fled to bigger banks that were deemed too-big-to-fail under the 2010 Dodd-Frank Act. First Republic represents another failure of the Dodd-Frank regime and regulatory oversight. This is not a reason to give the regulators who failed more power

“The White House is proclaiming that banking problems are now contained, and Wall Street seems to agree. But losses on commercial and maybe residential real-estate loans are piling up on bank books, and who knows what else is lurking in the financial weeds? There’s a reason the FDIC had to agree to assume most of First Republic’s future loan losses.”

Editorial Board, Wall Street Journal

“The U.S. government has entrusted the same person to buy the remains of the second-largest bank failure in the nation's history whom it also entrusted to oversee the first-largest. As was true in 2008 when Jamie Dimon was beckoned by Uncle Sam to shell out $1.9 billion for Washington Mutual, the JPMorgan Chase CEO is once again responsible for cleaning up the collapse of First Republic Bank. History may not quite repeat itself, but it does rhyme

“Chief among the parallels here is that both with the Great Recession and the current credit crisis, Dimon predicted and prevented the obvious at his own banks. Dimon sold most of JPMorgan's $12 billion of subprime loan operations in 2006 specifically due to the sharp rise in costs of credit default swaps…

“JPMorgan hedged against rising interest rates throughout 2021, hoarding cash instead of purchasing the Treasurys that Silicon Valley Bank and First Republic stockpiled…

“Ironically enough, Dimon would later lament his decision to take on Washington Mutual and Bear Stearns. In a call to investors on Monday morning, Dimon struck a more optimistic note about the acquisition of FRB, calling it a ‘very clean bank.’… We best believe that Dimon's prognosis of bank stability is right, lest we have to learn what will happen if the day comes that JPMorgan Chase will not bail out the next big bank failure.”

Tiana Lowe Doescher, Washington Examiner

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