JPMorgan will aquire First Republic Bank, easing the burden on taxpayers
Jamie Dimon is back at the bailout rodeo again. After the Bear Stearns purchase 15 years ago, the JPMorgan CEO said he’d never ride to the rescue again.
In the wee hours of Monday morning, however, he agreed to take the mid-sized First Republic Bank out of receivership by the Federal Deposit Insurance Corp.
That eases the burden on taxpayers for now and should benefit shareholders in his megabank, but it shows that U.S. authorities don’t know how to rescue collapsing lenders without further exacerbating the risky „too-big-to-fail” mentality.
For JPMorgan, it’s a hands-off deal. The bank is acquiring nearly $229 billion worth of assets and taking on about $173 billion worth of loans at a discount of about 13% to book value.
After taxes and the $10.6 billion payment to the FDIC, JPMorgan is expected to make a profit of $2.6 billion before integration costs. And JPMorgan doesn’t expect its capital cushion to suffer.
To secure Dimon’s support, the FDIC has brought a few goodies. The agency will share up to 80% of the losses on the bulk of First Republic’s loan portfolio.
In addition, the FDIC is making a $50 billion loan on specific terms that haven’t yet been disclosed.
Under normal circumstances, JPMorgan wouldn’t have been allowed to buy First Republic at all, certainly not with backstops.
Banks that already hold at least 10% of U.S. deposits aren’t allowed to acquire through buyouts. JPMorgan already crossed that threshold at $2 trillion at the end of last year.
The acquisition strengthens JPMorgan’s and Dimon’s influence. Citigroup’s Jane Fraser, Bank of America’s Brian Moynihan and PNC Financial Services’ Bill Demchak can only watch their biggest rival get bigger.
The 4% rise in JPMorgan shares on Monday also shows that Dimon is able to use the government’s largesse to his advantage.
The handling of First Republic raises the question of the next bank to fall. By requiring 11 lenders, including JPMorgan, to put $30 billion in deposits into First Republic in late March, the FDIC made it nearly impossible to put those positions at risk later.
This put the agency in a precarious negotiating position and shows that it’s still wrestling with how to protect U.S. savers without taking on additional moral hazard.
The situation also gives Dimon an edge. He has saved First Republic’s depositors and, to some extent, the FDIC. There is no guarantee that taxpayers will be better off if he rides off into the sunset. The challenge is to make sure it’s his last rodeo.