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nside the $30 billion rescue of First Republic Bank

March 17th, 2023

The $30 billion rescue of First Republic Bank began with a series of phone calls Tuesday between JPMorgan Chase CEO Jamie Dimon, Federal Reserve Chair Jerome Powell and Treasury Secretary Janet Yellen.

Dimon was in Washington, according to a person familiar with the events, and he wanted to discuss some issues that concerned bank capital. The subject soon turned to the fate of the nation’s 14th-largest bank.

Shares in the San Francisco lender had been sliding since last week’s failure of Santa Clara-based Silicon Valley Bank, and an $70 billion in financing from JPMorgan Chase and the Federal Reserve announced Sunday failed to alleviate the pressure as this week began. The stock dropped 62% on Monday.

The CEO of the nation’s biggest bank, the Fed chair and the Treasury secretary started brainstorming, according to people familiar with the discussions, with input from another powerful regulator: Federal Deposit Insurance Corporation Chair Martin Gruenberg. Their idea? JPMorgan could give First Republic some deposits.

Such an infusion could help solve a major concern. Deposit withdrawals are what put pressure on Silicon Valley Bank and made it impossible to continue standing on its own. Last Thursday, customers withdrew $42 billion in just one day, leaving the bank with a negative cash balance, and regulators seized the bank Friday. The concern was the same could happen to First Republic.

The next day, Dimon took this idea to some of his peers. At a Bank Policy Institute event, he approached other executives, including Citigroup CEO Jane Fraser, and commitments for $5 billion in uninsured deposits from Citigroup (C), Bank of America (BAC) and Wells Fargo (WFC) soon followed. JPMorgan also agreed to put in $5 billion.

JPMorgan Chase & Company Chairman and CEO Jamie Dimon testifies at a Senate Banking Committee hearing in 2022. (AP Photo/Jacquelyn Martin)

An infusion of $20 billion was considered enough, but these four banks decided to seek more from smaller rivals on Wednesday and Thursday. U.S. Bancorp (USB), Truist (TFC), PNC (PNC), State Street (STT) and Bank of New York Mellon (BK) each agreed to deposits of $1 billion. The last to join, according to the people familiar with the events, were Goldman Sachs (GS) and Morgan Stanley (MS). They each agreed to deposit $2.5 billion.

“A whole bunch of deposits flowed into the big banks over the last five days,” said one of the people familiar with the deal. “This is basically recirculating the capital.”

The attempted rescue of one of the country’s biggest regional lenders places Dimon at the center of a national banking crisis for the second time in 15 years.

In 2008, he acted twice to help stabilize the financial system when JPMorgan Chase (JPM) purchased New York investment bank Bear Stearns in March of that year, getting a $29 billion backstop from the federal government, and then Seattle’s Washington Mutual in September of 2008. In the case of Washington Mutual, JPMorgan Chase purchased its operations after regulators seized the Seattle thrift. It still is the nation’s largest ever bank failure.

The two deals turned JPMorgan Chase into the nation’s biggest coast-to-coast bank and provided it with an even more powerful hand on Wall Street. They also saddled it with years of legal and regulatory headaches. Dimon has said if he could do it over again he would not have purchased Bear Stearns for those reasons.

The $30 billion infusion announced Thursday lifted First Republic’s shares, which ended the day up 10%. Powell, Treasury Secretary Janet Yellen and two other regulators said in a joint statement that “this show of support by a group of large banks is most welcome, and demonstrates the resilience of the banking system.”

JPMorgan is getting no special arrangements as part of this deal, according to one of the people familiar with the talks. “These deposits will be treated the exact same way anyone’s non-insured deposit would be treated,” this person said. The deposits have to stay at First Republic for 120 days and earn interest at the same rate of current depositors.

“The selfish part,” this person added, “is strengthening the banking industry, which lifts all boats.”

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