As the Wicked Witch of the West orders her minions toward the end of Wizard of Oz, “Seize them!”
And seize them, they did.
San Francisco bank First Republic was taken over by the Federal Deposit Insurance Corporation over the weekend and was sold to too big to fail JPMorgan Chase in the pre-dawn hours this morning.
All in a day’s work.
It was the third bank failure in two months and the second-largest in the nation’s history, and the one unanswered question now is, is there a systemic banking crisis or not?
What’s Going On?
JPMorgan, the country’s largest bank, will assume all of First Republic's $92 billion in deposits, including ones that weren't insured.
The FDIC didn't even need to invoke its so-called “systemic risk exception” to insure them, as it did with Silicon Valley and Signature Banks.
Members of Congress who run the banking committees in both houses generally praised the federal takeover of First Republic and called its sale to JPM an example of a successful public-private collaboration.
Rep. Maxine Waters of California and the top Democrat on the House Financial Services Committee said: “This prompt and cost-effective sale of the bank protects depositors, limits contagion, and ensures that no cost is borne to our nation’s taxpayers.”
Perhaps. Still, such effusive praise should raise our eyebrows, given the nearly $17 million in campaign contributions the commercial banking industry gave to members of Congress in 2022, according to OpenSecrets.org.
But as Pam and Russ Martens of Wall Street on Parade remind us, it shouldn’t be lost (but, apparently, it has been on the regulators that approved the sale and their fans in the Capitol) that JP Morgan is a five-time felon, with the same CEO – Jamie Dimon – at its helm.
But I digress…
By Dave Allen for Discount Gold & Silver
As the Wicked Witch of the West orders her minions toward the end of Wizard of Oz, “Seize them!”
And seize them, they did.
San Francisco bank First Republic was taken over by the Federal Deposit Insurance Corporation over the weekend and was sold to too big to fail JPMorgan Chase in the pre-dawn hours this morning.
All in a day’s work.
It was the third bank failure in two months and the second-largest in the nation’s history, and the one unanswered question now is, is there a systemic banking crisis or not?
What’s Going On?
JPMorgan, the country’s largest bank, will assume all of First Republic's $92 billion in deposits, including ones that weren't insured.
The FDIC didn't even need to invoke its so-called “systemic risk exception” to insure them, as it did with Silicon Valley and Signature Banks.
Members of Congress who run the banking committees in both houses generally praised the federal takeover of First Republic and called its sale to JPM an example of a successful public-private collaboration.
Rep. Maxine Waters of California and the top Democrat on the House Financial Services Committee said: “This prompt and cost-effective sale of the bank protects depositors, limits contagion, and ensures that no cost is borne to our nation’s taxpayers.”
Perhaps. Still, such effusive praise should raise our eyebrows, given the nearly $17 million in campaign contributions the commercial banking industry gave to members of Congress in 2022, according to OpenSecrets.org.
But as Pam and Russ Martens of Wall Street on Parade remind us, it shouldn’t be lost (but, apparently, it has been on the regulators that approved the sale and their fans in the Capitol) that JP Morgan is a five-time felon, with the same CEO – Jamie Dimon – at its helm.
But I digress…
Right now, we’re being told that JPM’s acquisition cost is much lower than expected.
But because there's a change of ownership, JPM will have to mark First Republic's book of loans at market value and take the losses on those loans.
Felix Salmon reports that those losses will be shared with the FDIC at a cost of about $13 billion to its insurance fund – far less than the $30 plus billion the market was expecting.
Under the Dodd–Frank Act of 2010, the FDIC is required to fund its Deposit Insurance Fund at a certain percentage of all insured deposits at eligible U.S. banks.
According to the FDIC, as of 12/31/2022, the agency held $128.2 billion in its DIF based on total insured deposits of $10.068 trillion (a reserve ratio of 1.27%).
As was first speculated several weeks ago, First Republic's shareholders and bondholders – like those of SVB – will likely be wiped out and receive just cents on the dollar.
And for now, First Republic's executives are now employees of JPM, but many of them will surely leave for greener pastures where the prospects of big-time bonuses will grace their pocketbooks again.
Bank regulators have made it clear since the Great Recession that it's never their preference to allow too-big-to-fail banks like JPM to grow by acquisition.
But by selling First Republic to JPM, the federal government seems to be suggesting that there’s a growing banking crisis that outweighs those concerns.
The California Department of Financial Protection and Innovation, which was First Republic's primary state regulator, said the bank had become "unsafe or unsound."
Any deal that gets announced at 4:30 on a Monday morning is going to be a tad messy. But Salmon says this transaction “is clearly designed to try to mop up the mess rather than to create more of it.”
Reports Confirm Faulty Oversight
Emily Peck notes that state and federal bank regulators were “well aware of the problems” at both SVB and Signature Bank when they failed in March but weren't able to prevent a major blow up anyway.
Three separate autopsies on the bank failures released last Friday by regulators each highlighted how bank supervisors fell short in their oversight.
The Federal Reserve released a 114-page report that blamed the collapse of SVB on the bank itself.
It also faulted Fed supervisors charged with overseeing it, not to mention some federal regulations that were watered down during the Trump administration.
The FDIC published its internal review of its own handling of the supervision of Signature Bank.
For its part, the FDIC emphasized certain weaknesses in its oversight, blaming part of the problem on a significant understaffing problem.
And the Government Accountability Office released a report that noted one thing the two bank failures had in common: turns out that in both cases, regulators saw the risks but weren't able to get the banks to alleviate them.
As a whole, Peck says, all three reports essentially call into question the regulators' ability to regulate.
She reports that FDIC supervisors appear to have gotten the runaround from Signature Bank officials who had “little interest in addressing risks.” The FDIC report says the agency could've been more "forceful" in its supervision.
Red flags flashed before regulators with the risks of Signature's roughly 90% of uninsured deposits – unusually high.
But the FDIC report says there was little recognition by the bank's senior management that risk was even an issue – much less there being a contingency plan to handle fleeing customer deposits.
And flee they did – big time. In fact, on Friday, March 10, the bank lost 20% of its deposits in a couple hours.
Yet, the report noted that Signature's president "rejected examiner concerns" that same day – not long before regulators took over the bank.
The Fed's report on the supervision of SVB suggests that even its own staff didn't fully understand the risks the bank was taking on.
And even when risks were revealed, they weren't dealt with: "[F]oundational problems were widespread and well-known, yet core issues were not resolved, and stronger oversight was not put in place.”
Senior fellow at Brookings Aaron Kline observed, "It seems like the Fed is still not adequately appreciating how poorly it is doing its job as bank regulator."
The FDIC and Fed now want to tighten regulations. The Fed says it’s considering stricter rules on banks, a process that could take years, especially if they will need congressional approval.
But CNBC’s Jeff Cox says interest on Capitol Hill to amend Dodd-Frank to tighten the reins appears to “have waned” after an initial rush in the wake of the SVB and Signature failures.
Seize ‘em and Sell ‘em is one way to look at what happened today with First Republic Bank. Perhaps the more apropos way to see it, though, is Seize ‘em and Appease ‘em.