Why did JPMorgan buy Chase First Republic out of receivership?
Jamie Dimon stands in front of a door with a JPMorgan sign on it Jamie Dimon, the savior of the banking industry? You may wonder why JPMorgan Chase agreed to release the bankrupt First Republic Bank from receivership. But a better question might be: why not? As JPMorgan Chairman and CEO Jamie Dimon explained in […]
Jamie Dimon, the savior of the banking industry?
You may wonder why JPMorgan Chase agreed to release the bankrupt First Republic Bank from receivership. But a better question might be: why not? As JPMorgan Chairman and CEO Jamie Dimon explained in a company press release, “This acquisition benefits our business overall in a modest way, it adds to shareholders, it helps further advance our asset strategy. and it complements our existing franchise.”
In other words, no problem. And it really not a big deal compared to JPMorgan’s $3.7 trillion in assets at the end of March, which will now grow by about $200 billion thanks to the purchase of First Republic.
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Of course, for anyone concerned about the implications of too-big-to-fail institutions, this acquisition adds about $200 billion in ballast to the argument.
Why did the FDIC choose JPMorgan Chase’s bid for First Republic?
It’s not often that CEOs enter high-profile contests for things they expect will only “modestly benefit” their company. But it’s also rare for a $3.7 trillion bank to receive immediate regulatory approval to sell virtually all of the assets of a $229.1 billion bank, plus $104 billion in deposits. to swallow from one day to the next.
The FDIC says First Republic’s resolution “involved a highly competitive bidding process and resulted in a transaction that complied with the lowest cost requirements of the Federal Deposit Insurance Act.” As part of the deal, the FDIC and JPMorgan will share in losses, as well as any recoveries, on First Republic’s residential and commercial loans. JPMorgan Chase will not assume First Republic’s corporate debt or preferred stock as part of the deal.
All 84 First Republic offices in eight U.S. states will reopen today (May 1) as affiliates of JPMorgan Chase, and clients of the former First Republic will have “full access to all of their deposits,” the FDIC said.
All told, the FDIC estimates that putting First Republic into receivership will cost its Deposit Insurance Fund, which is primarily financed by attacks on U.S. banks, about $13 billion.
“Our government invited us and others to step forward, and we did,” Dimon said in JPMorgan Chase’s statement on the deal. “Our financial strength, capabilities and business model enabled us to develop an offer to execute the transaction in a manner that minimized costs to the Deposit Insurance Fund.”
Memories of Bear Stearns, WaMu
Dimon worked closely with US Treasury Secretary Janet Yellen in March to raise a total of $30 billion deposited into First Republic by 11 major US banks.
The rescue attempt failed. On April 24, First Republic announced that customers had drawn more than $100 billion in deposits from the bank in the first quarter, leading to another crash of First Republic stock and ultimately putting the bank into receivership. And Dimon was there to help again.
A full takeover of a bank is much riskier than a deposit injection. Dimon of all people knows this. Over the years, he has made it no secret that he regrets buying Bear Stearns and Washington Mutual in 2008. While those acquisitions embellished his role as the white knight of banking and came to the aid of troubled institutions that otherwise posing risks to the broader financial system, they also opened his business to billions of dollars in unforeseen legal fees. As Dimon wrote in 2015 in a letter to shareholders (pdf):
No, something like Bear Stearns we wouldn’t do again – in fact, I don’t think our board would let me take the call. The WaMu deal may still make sense, but at a much lower cost to offset lingering legal uncertainty (including the government’s ability to take away our negotiated fees). I had not expected, and perhaps could not have foreseen, such a turn of events. These are expensive lessons that I will not forget.
JPMorgan Chase shareholders are confident that this is the case. And there is reason for them to be optimistic. Though mired in a panic that seems to keep banks in check with unusually large amounts of uninsured deposits and balance sheets overloaded with interest rate risk, First Republic was in much better shape than most banks in 2008, when many institutions were concentrated in toxic assets with low chances of recovery and high legal risks.
Shares of JPMorgan react positively to First Republic news
JPMorgan Chase says it will take a one-time gain of $2.6 billion linked to the transaction, but also $2 billion in related restructuring costs spanning 2023 and 2024. Excluding these items, the acquisition is expected to generate more than $500 million per add years to JPMorgan’s net income.
In a sign of investor confidence in the move, shares of JPMorgan, which closed Friday at $138.24, rose more than 4% in pre-market trading on Monday.
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