When US officials announced on Monday they had found a buyer for First Republic, the second largest bank failure in American history, the successful bidder’s identity was for many in finance a foregone conclusion.
Though more than a dozen institutions looked at First Republic’s assets, and four banks bid and rebid repeatedly last weekend, in the end the winner was JPMorgan Chase.
During the 2008 financial crisis, America’s largest bank was the saviour of choice for failing investment bank Bear Stearns and bankrupt mortgage lender Washington Mutual, the biggest ever bank failure.
It has been the same this time round. For policymakers trying to stabilise a regional banking sector that has been wobbling since Silicon Valley Bank collapsed on March 10, it would be hard to imagine a safer pair of hands. Chief executive Jamie Dimon is not just the longest serving big bank leader but is also seen as a master at integrating acquisitions.
“Broadly speaking, sticking a bank that is losing its franchise value inside a large bank like JPMorgan is the best possible crisis-time solution,” says Steven Kelly, who researches financial stability at Yale School of Management. “Large banks have been a partner to the government and played the white knight role.”
Yet while Dimon has presented the takeover as a form of public service, there are plenty of critics who insist the outcome is further proof that the system is stacked in favour of behemoth banks in general — and JPMorgan in particular.
“Jamie Dimon should have never been permitted to take over a failing bank because JPMorgan is already too big to fail,” said Senator Elizabeth Warren, a longtime critic of Wall Street’s excesses.
Observers both marvel and complain about how, when problems hit the US banking sector, all the roads always seem to lead to JPMorgan.
A financier close to the Biden administration complains that the multiple hats that Dimon has worn during the recent turbulence have given him too much influence. “An adviser, a principal, a maestro, the whole thing doesn’t make sense,” the person says. “All along, [he was] calling the shots. All along.”
The making of a juggernaut
JPMorgan today, with $3.7tn in assets and 250,000 employees, is the result of a centuries-long consolidation process. Its heritage includes a company started by the US founding father Alexander Hamilton, the investment bank run by legendary financier John Pierpont Morgan as well as lenders that financed the Erie Canal, the Brooklyn Bridge and the UK and French armed forces in the first world war.
Even as recently as 1991, the retail bank that would eventually become a global banking juggernaut had only $37bn in deposits. The group now has almost $2.5tn and its market share has grown by 10 times, from 1.5 per cent to 14.4 per cent.
“They took a whole bunch of companies that were regional-based banks and really created national franchises out of it,” said Chris Kotowski, banking analyst at Oppenheimer.
But it was under Dimon, who joined the bank in 2004 when it took over Chicago-based Bank One, that the group really pulled ahead. JPMorgan is now the largest bank in the US by assets, deposits and market capitalisation, with Chase bank branches in 48 states. It also earns more from investment banking fees than any other Wall Street bank, consistently outranking Goldman Sachs, Morgan Stanley and Bank of America.
As with today’s regional banking ructions, the 2008 crisis brought a special opportunity for JPMorgan. Because it controls more than 10 per cent of US deposits, it is barred from buying other banks except in an emergency transaction. The Bear Stearns and WaMu deals and JPMorgan’s relatively unscathed path through the financial crisis won Dimon lasting respect. Former president Barack Obama described the silver-haired New Yorker in 2012 as “one of the smartest bankers we got”.
The bank’s record under Dimon has not been unblemished. The 2012 London Whale trading scandal cost $6bn and the bank is being sued over its work for convicted sex offender Jeffery Epstein. In addition, regulatory penalties from the old Bear Stearns and WaMu businesses led Dimon to tell shareholders in 2015 that the transactions had been “expensive lessons that I will not forget . . . We would not do something like Bear Stearns again”.
Still, Dimon was the first port of call when Treasury secretary Janet Yellen was looking for help on March 14 with First Republic. At the time, it was the US’s 14th largest bank but it had many of the same vulnerabilities that undermined SVB, including a reliance on uninsured deposits, close connections to the tech industry and paper losses on long-dated assets. It was suffering what would become a $100bn deposit run and its shares had dropped 75 per cent in less than two weeks.
JPMorgan’s bankers were already advising First Republic on its options, which included early inquiries from a Canadian bank about a potential purchase, people briefed on the situation say. But fears were mounting that another rapid collapse would destabilise the entire banking system.
Over the next two days, Dimon corralled the chief executives of 10 other large banks and on March 16 they collectively agreed to hand First Republic $30bn in deposits. The aim was to buy the smaller lender time to find a private sector solution.
Senior figures in the US government encouraged some banks to consider a takeover, but they did not put on the hard sell, people familiar with the process say. That left First Republic twisting in the wind as its share price sagged, short sellers circled and depositors fled.
First Republic founder Jim Herbert and advisers, Peter Orszag at Lazard and the Sullivan & Cromwell law firm, scrambled to keep the bank independent. They tried to assemble a three-part package that included raising private equity money, getting other banks to buy some assets at above market prices in exchange for a slug of stock, as well as some government support.
But the Federal Deposit Insurance Corporation, advised by longtime investment banker and former Obama administration official Jim Millstein, became frustrated. It believed that the financial engineering would have required government assistance that would have been inconsistent with the spirit of the Dodd-Frank reform law passed after the financial crisis, people familiar with the discussions say.
The pressure on the bank increased on Monday April 24, when First Republic revealed the extent of customer withdrawals, and chief executive Michael Roffler spooked investors by refusing to take questions on an earnings call.
By the morning of Thursday April 27, the FDIC was telling potential bidders that First Republic was weeks away from being taken over by the authorities. The timetable suddenly sped up and a dozen big financial institutions were asked to put in indicative bids by the next day.
Those institutions that made the second round were given digital access to data about First Republic’s liabilities and assets being assembled in real time by Guggenheim Securities bankers who were advising the FDIC.
Some big lenders, including Bank of America, declined to participate but ultimately four of the 20 largest US banks by assets emerged as leading bidders: PNC, Citizens Bank, Fifth Third and JPMorgan, which relinquished its role as First Republic’s adviser to join the auction.
Huge deal teams for the banks worked round the clock over the weekend to assemble their bids ahead of a deadline on Sunday afternoon. But amid the frenetic activity, frustration was building about the FDIC’s requests.
“They’re setting up the bidding rules in a way that heavily favours a [heavily capitalised global] bank. Not intentionally but that’s what they are doing,” one participant observes.
Under a 1992 law, the FDIC must choose the solution that imposes the “least cost” on the deposit insurance fund. Many staffers there still remember that the 2008 crisis, which led to the closure of more than 150 banks, had left the deposit insurance fund with a negative balance.
“If you’re a career staffer there, all you care about is, ‘How do I save money?’ You’re thinking, ‘What if there’s another one [a bank collapse] tomorrow?’” says one former FDIC employee.
The FDIC found it difficult to compare the complicated bids, participants say. The task was made harder by the fact that at least some involved multiple parties. PNC, for example, proposed selling parts of First Republic’s loan book to either BlackRock or Apollo in an effort to make the offer more attractive.
After final bids went in at 7pm Eastern Time on Sunday, JPMorgan’s proved to be both simpler and cheaper, with an estimated loss to the deposit fund of $13bn. By 1am on Monday, the bank had heard that it had won, and the results were made public shortly after 3am.
“Jamie Dimon played his cards very well,” says Simon Johnson, MIT economics professor and former IMF chief economist. “When ‘least cost’ resolution was designed, we didn’t have such big banks and did not have such a skew towards really big banks. That bigness does help one bank in particular.”
JPMorgan chief financial officer Jeremy Barnum earlier this week rejected any suggestions of a conflict of interest, saying separate teams had advised First Republic and later worked on acquisition.
Dimon described the deal as a public service, saying the government had invited the bank to “step up, and we did”.
Others pointed out that it will add roughly $500mn of annual income to the bank’s earnings.
“There’s a phrase that people use called profitable patriotism. And that’s what this might be,” says Richard Sylla, emeritus professor of economics at New York University’s Stern School of Business.
Although Biden had vowed to take a tougher stance on bank mergers since taking office, the administration has concluded that in certain situations having a big bank take over a failing smaller one might end up being the least disruptive solution. Biden described himself as “pleased” by the First Republic result, adding: “These actions are going to make sure that the banking system is safe and sound.”
Republicans, meanwhile, praised the deal for avoiding a blanket government deposit guarantee for very large accounts, as had happened with SVB.
Some Democrats described it as the best available solution given the circumstances. The FDIC insurance fund currently has $90bn in it to handle the fallout from a banking system with more than $17tn in deposits.
“Our big banks are too big, but right now it’s a matter of minimising the cost,” said Brad Sherman, a Democrat in the House of Representatives. “Of all the things leading to consolidation, this is a minor step.”
Federal Reserve chair Jay Powell took a similar view at a press conference on Wednesday, saying, “I think it’s actually a good outcome for the banking system. It also would have been a good outcome for the banking system had one of the regional banks bought this company . . . [but] the law is, it goes to the least-cost bid”.
Others are far less sanguine. Warren argued that the Office of the Comptroller of the Currency, which had to sign off on the deal because it is JPMorgan’s primary regulator, should have refused to do so.
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“We need a full explanation from OCC Acting Director [Michael] Hsu . . . on why he approved this giant bank merger and ignored other bids that posed less danger to the economy,” she said. OCC said “approval of this transaction mitigated a further loss of confidence in the banking system by minimizing uncertainty”.
Former FDIC chair Bill Isaac says that while he credited JPMorgan for doing “a great public service” by buying a series of failed banks, “I just question whether that is the outcome we should want as a matter of public policy . . . You make the largest banks bigger and bigger and you have fewer choices going forward.”
To some involved in the process, the whole thing was a foregone conclusion.
“It was obvious it would end as it did,” says the financier close to the Biden administration. “Jamie set the whole thing up. And he got a great, great deal. So credit to him, if that’s what you want.”