Largest U.S. Lenders Toss First Republic Bank a Lifeline

photo: media.nbcbayarea.com

On Tuesday, Jamie Dimon, CEO of JPMorgan Chase & Co., and U.S. Treasury Secretary Janet Yellen had a conversation during which Yellen proposed the idea of the largest banks depositing billions of dollars into First Republic Bank, a firm experiencing depositor panic. Dimon was interested and subsequently contacted the heads of the next three largest U.S. lenders, Bank of America Corp., Citigroup Inc., and Wells Fargo & Co.

Throughout the month, large banks have been accumulating deposits from customers of smaller banks who are feeling anxious. Now, these big banks are taking some of their own money and giving it to a struggling San Francisco bank in an attempt to stop a crisis from spreading.

Over the course of two days, the CEOs of 11 banks were involved in phone calls, meetings, and some persuasion, resulting in an agreement to contribute a total of $30 billion to First Republic. The money will be held there for at least 120 days.

The goal is to rescue First Republic, a bank known for serving wealthy tech executives, by providing enough funding to save it. Alternatively, the money could give the bank time to explore other solutions, such as a sale.

This is the latest attempt to combat what is becoming known as the "Panic of 2023" in the United States and Europe.

Jamie Dimon's efforts to lead the rescue are drawing comparisons to the Panic of 1907, when J. Pierpont Morgan, who founded the company that Dimon currently leads, gathered Wall Street financiers in his private library and pressured them into supporting the Trust Company of America to prevent a series of bank runs that threatened to destabilize the industry.

Janet Yellen, U.S. Treasury secretary, speaks during a Senate Finance Committee hearing in Washington, on Thursday | BLOOMBERG

One reason why large banks were willing to step in and help during the Panic of 1907 was that the U.S. government had limited ability to do so, which eventually led to the establishment of the Federal Reserve. In contrast, regulators were already monitoring First Republic this time around, which raised the possibility of emergency government intervention and potential political backlash for years to come.

Todd Baker, a senior fellow at Columbia University's Richard Paul Richman Center for Business, Law, and Public Policy, stated that if this rescue plan succeeds, it would be a brilliant "two-fer" for the big banks. They were previously criticized for taking deposits from smaller lenders, but now they can demonstrate that they are part of the solution. Meanwhile, the Biden administration has one less bank to worry about.

Last weekend, regulators attempted to calm U.S. banking customers by promising to fully compensate uninsured deposits following the failures of SVB Financial Group and Signature Bank. In addition, the Federal Reserve made two facilities available to assist other banks in meeting any withdrawal demands.

However, there is no assurance that this plan will succeed, and it appears that the problems in the financial system have not yet subsided. On Thursday morning in Zurich, the Swiss National Bank provided Credit Suisse Group AG with a $54 billion infusion of liquidity to keep the company afloat while it undertakes a restructuring of its operations.

Later on Thursday, the Federal Reserve released data revealing the extent to which banks are relying on its aid. In the week ended March 15th, they collectively borrowed $164.8 billion from two safety-net facilities. This amount encompasses a historic sum of $152.85 billion borrowed from the discount window, the conventional source of liquidity for banks. The previous peak of borrowing from the discount window was $111 billion, which occurred during the 2008 financial crisis.

JPMorgan Chase & Co. President and CEO Jamie Dimon | REUTERS

Against this backdrop, insiders familiar with the discussions - who requested anonymity to preserve the confidentiality of the talks - have reported that the majority of large US banks were eager to demonstrate their willingness to contribute to the effort. Yellen brought up the proposal early on with high-ranking officials, including Federal Reserve Chair Jerome Powell and FDIC Chairman Martin Gruenberg.

As the initiative gained momentum on Wednesday, a flurry of phone calls occurred between bankers, and more firms agreed to participate. Nevertheless, some CEOs needed to be convinced, questioning the necessity of the rescue or its potential efficacy. Yellen personally reached out to some of these executives, while also keeping White House Chief of Staff Jeff Zients and National Economic Council Director Lael Brainard informed of the situation.

By Thursday, most of the group had been formed. It is possible that some slow-moving members were invited late or needed more time to get internal approvals. Goldman Sachs Group Inc. was one of the last few to join.

On Thursday morning, there was another call between regulators and CEOs which helped to finalize the plan.

“This demonstration of support by a group of major banks is very welcome and shows the resilience of the banking system," said Yellen, Powell, Gruenberg, and acting Comptroller of the Currency Michael Hsu in a joint statement.

In some ways, this rescue is similar to the 1998 plan that was created to bail out Long Term Capital Management without using public money, after the hedge fund made disastrous bets. At that time, the Fed called a meeting of Wall Street executives from Merrill Lynch, Goldman Sachs, and about a dozen other companies. They agreed to invest $3.65 billion in the fund to keep it afloat and prevent a collapse in financial markets.

Similar to the case of LTCM, one of the sources mentioned that the banks realized that saving First Republic was in their best interest, as it was better than the risk of a widespread panic that could engulf more of them.

“This is the banking system taking care of itself,” said Todd Phillips, a former FDIC attorney now at the Roosevelt Institute.

One challenging aspect of the $30 billion lifeline is allocating the credit. Although Dimon played the role of J. Pierpont Morgan behind the scenes, the banks cooperated on a joint statement. They grouped their names based on the size of their contributions and listed them alphabetically.

As a result, Bank of America was listed first.

However, in a chaotic rush of press releases, Citigroup happened to send theirs out first.