Here’s why the ‘too big to fail’ banks bailed out the First Republic

A consortium of 11 giant banks apparently in competition with each other came together Thursday to rescue one of their own, California-based First Republic, to help stabilize the reeling U.S. financial system.

The $30 billion transfer to First Republic from banks including JPMorgan, Citigroup and others deemed “too big to fail” in the wake of the 2008 financial crisis is spurring a flight of deposits away from smaller lenders.

It also raises eyebrows about the relationship between Wall Street and the federal government.

The private sector bailout came days after a public sector bailout of Silicon Valley Bank (SVB) and Signature Bank by the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve and the Treasury Department.

In that deal, taxpayer money is used to stop a federal line of credit extended to distressed banks.

Administration officials maintain that the move to save First Republic was prompted by the financial sector, but multiple outlets report that Treasury Secretary Janet Yellen leaned on JPMorgan CEO Jamie Dimon to get the deal done.

The effects of the news on the beleaguered First Republic, which at one point had lost 80 percent of its stock value since Monday, were immediate.

First Republic shares rose 10 percent on news of the bailout Thursday, but fell more than 30 percent in Friday trading.

Here’s what you need to know about the latest bank bailout and what it means for the relationship between government and big finance.

A call for consequences: Biden calls on Congress to crack down on bankrupt bank CEOs

Federal Reserve Chairman Jerome Powell arrives to discuss his semiannual monetary policy report to Congress before the Senate Banking, Housing and Urban Affairs Committee, Tuesday, March 7, 2023.

Private banks say the bailout was their idea, but reporting indicates otherwise

Banking industry representatives told The Hill that the $30 billion bailout of First Republic was the banks’ idea and that the move was designed to stabilize the financial sector in the interest of the broader economy.

The economy has been under pressure from eight consecutive rate hikes by the Federal Reserve.

US officials have echoed that line, saying they support the move but are not responsible for it.

“This support from a group of major banks is extremely welcome and demonstrates the resilience of the banking system,” read a Thursday statement from the Treasury Department and other government agencies.

But reporting by the New York Times and other outlets indicates that the private sector bailout was Yellen’s idea and that she suggested it to JPMorgan’s Dimon, who then got industry leaders to raise the funds.

A real-time rescue: Megabanks save the First Republic

“Despite still feeling hurt by the fallout from JPMorgan’s bailouts of Washington Mutual and Bear Stearns during the 2008 financial crisis, Dimon began calling other CEOs to raise the money,” the Times reported in its Dealbook newsletter Friday.

“Jamie Dimon and Janet Yellen were in conversation Tuesday when she got an idea: What if the nation’s biggest lenders put billions of dollars into First Republic Bank, the latest firm pushed to the brink by depositor panic,” Bloomberg News reported. Thursday.

Treasury Secretary Janet Yellen arrives for a Senate Finance Committee hearing
Treasury Secretary Janet Yellen arrives at a Senate Finance Committee hearing to discuss President Biden’s fiscal 2024 budget Thursday, March 16, 2023. Annabelle Gordon

The bailout avoided another appeal for taxpayer funds

The private bailout takes taxpayers off the hook for another bank failure, just days after their money was put up to insure wealthy depositors from the venture capital industry at SVB.

Political backlash from another round of public bank bailouts may have been what the Biden administration sought to avoid by asking private bankers for their help.

“This with First Republic, it’s disappointing,” former FDIC Chairman Sheila Bair said on the CNBC television network Friday. “I’m glad that at least they didn’t use state aid, that the private banks came in to try to stabilize it, but it’s not clear that it’s working. The problem with this is that fear becomes the big problem. “

“This is a classic Jimmy Stewart problem,” she added, referring to the famous pop culture example of a bank heist in the Christmas classic “It’s a Wonderful Life.”

Nobody likes rescues? ‘Unfortunate and wrong’: Angry taxpayers react to latest bank bailouts

Bair said people need to understand that deposits in a bank are not just locked up but are reinvested in ventures that have varying degrees of risk.

Billionaire investor Bill Ackman called First Republic’s bailout “bad politics” in a tweet on Thursday and insinuated that behind the scenes assurances were being given of taxpayers’ money.

“Diffusing the risk of financial contagion to achieve a false sense of confidence in (First Republic Bank) is bad policy,” he wrote. “They (systemically important banks) would never have made this low-return investment in deposits unless they were pressured to do so and without assurances that (First Republic Bank) deposits would be stopped if it failed.”

Other financiers disagreed, emphasizing the commercial nature of the consortium’s investment.

“It’s a commercial transaction, it’s the right thing to do. Yes, it was encouraged by the Treasury and the Fed, but it’s the right thing to do, and frankly they’re getting paid for it. So it’s not a bailout,” said Westwood Capital’s founder Dan Alpert in an interview with The Hill.

“Borrowing deposits from other banks is hardly new. Broker deposits are something that have been around forever. It is clear that there is a desire for liquidity in various institutions and for an increase in deposits, but the fact is that there are excess deposits in many banks,” he added.

FILE – The Department of the Treasury seal outside the Treasury Department building in Washington on May 4, 2021. (AP Photo/Patrick Semansky, File)

Smaller banks are fuming mad

Small and medium-sized banks are furious after Yellen told Congress this week that only the big banks would be bailed out by taxpayers and not the $23 trillion banking industry as a whole.

“The nation’s community banks condemn today’s statements by Treasury Secretary Janet Yellen that uninsured deposits will only be protected at systemically risky banks, a bailout for big banks that rewards mismanagement and risky behavior,” Rebeca Romero Rainey, president of Independent Community Bankers of America, said in a statement Thursday.

Ironically, investors note that JPMorgan and others’ seemingly charitable moves toward First Republic may end up helping their companies by making them appear as trustworthy as the federal government.

“Let’s face it. The big banks have been huge beneficiaries in the last week,” Alpert said. all banks that are below the top five and have pulled their money and moved it to JPMorgan or a top five bank.”

“This has been ridiculous,” he said. “People have panicked, mind you. It’s been crazy, it’s been absolutely insane.”

Taxpayers are still angry about the financial sector’s bailouts

New polling by Ipsos released this week on attitudes toward bank bailouts shows a large majority of Americans believe taxpayers shouldn’t be on the hook for failing banks

“84 percent of Americans agree — 56 percent strongly agree — that taxpayers should not foot the bill for irresponsible bank management, including 85 percent of Democrats and 86 percent of Republicans,” the survey found.

More background: What you need to know about this week’s banking crisis

But the polls also found that 49 percent of Americans are “in favor of government support for U.S. financial institutions,” up from 37 percent in 2012.

“We live in capitalism, so we can’t get our economy to stop,” Ellen McTigue, a retired nurse from New York, told The Hill in an interview. “I just feel, where is it really going?”

A sign bearing the name JP Morgan Chase and Co below the company's headquarters
JP Morgan was one of 11 banks that put together a rescue package for First Republic.

Could the taxpayers be called upon to stop the entire banking system again?

The White House issued a statement Friday saying Congress should allow the FDIC to punish the executives of failed banks more harshly, freeze their pay and ban them from future banking.

But the president did not consider whether to call on Congress to have the FDIC freeze the entire banking sector and all deposits in the industry over $250,000, as it did with SVB.

Former FDIC Chairman Bair said Friday that this should only happen if “genuine systemic problems with uninsured deposits” begin to emerge.

Rounding up the tab: Here’s who’s paying to restore Silicon Valley, Signature Bank deposits

“We did it during the great financial crisis. It would be temporary,” said Bair. “Of course you have to charge the banks an extra premium to provide the coverage. Look, I don’t like bailouts of any kind, so I would only do this if they see real systemic problems with uninsured deposits.”

House Financial Services Committee Republican Blaine Luetkemeyer (R-Mo.) told Politico on Wednesday that Congress should actually insure all bank deposits on a temporary basis.

“If you don’t do this, there will be a run on your smaller banks,” he said. “Everybody’s going to take their money out and run to JPMorgan’s and these too-big-to-fail banks and they’re going to get bigger and everybody else is going to get smaller and weaker and it’s going to be really bad for our system.”

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