First Republic Passes Away Peacefully. Is In Better Place Now

I have some bad news. After a hard fight, First Republic passed away overnight. It was closed early Monday by California regulators.

But don’t despair. Think of the pain it was in. That’s gone now. And it’s on its way to a better place: JPMorgan.

“Our government invited us and others to step up, and we did,” Jamie Dimon declared. “Our financial strength, capabilities and business model allowed us to develop a bid to execute the transaction in a way to minimize costs to the Deposit Insurance Fund.”

Dimon acquired “the substantial majority” of the beleaguered San Francisco lender’s assets, and assumed $92 billion of deposits, all of which (insured and uninsured) are protected. By JPMorgan. First Republic’s offices — all 84 of them, across eight states — are now branches of JPMorgan, and were set to reopen “during normal business hours.”

All First Republic depositors became JPMorgan depositors effective immediately, although they’ll need to “use their existing branch until they receive notice from JPMorgan that it has completed systems changes to allow other JPMorgan branches to process their accounts as well.”

There was no systemic risk exception involved, but the government will have to make an exception. For JPMorgan. Dimon wasn’t really supposed to buy any more deposit-taking institutions having amassed more than 10% of the country’s deposits on his own. Suffice to say this was a special situation. All regulatory approvals were received and the transaction has closed.

JPMorgan is acquiring $173 billion of loans and approximately $30 billion of securities in the deal. First Republic had around $229 billion in total assets when it was seized Monday. Dimon isn’t assuming First Republic’s debt or preferred stock. JPMorgan is making a $10.6 billion payment to the FDIC.

One hurdle to rescuing First Republic was its portfolio of jumbo mortgages and interest-only loans, which are virtually impossible to sell for obvious reasons. JPMorgan entered into a loss share agreement with the FDIC that covers “acquired single-family residential mortgage loans” as well as some commercial loans. That agreement, the government said, “is projected to maximize recoveries on the assets by keeping them in the private sector.”

Obviously, First Republic would’ve rather things not turned out this way. The bank was proud of its wealth management business. Marianne Lake and Jennifer Piepszak will run that now. “We look forward to welcoming First Republic employees,” they said Monday, promising to treat everyone “with respect, care and transparency.”

JPMorgan was one of several banks to bid for First Republic. The FDIC said the process was “highly competitive.” The US was keen to avoid the appearance of another government “bailout” following backlash in some corners around the decision to protect SVB’s uninsured depositors in March.

I’d suggest this is a distinction without a difference, though. JPMorgan is the quintessential example of a bank that wouldn’t be allowed, under any circumstances, to fail. Dimon would tell you that’s a meaningless statement because there are no such circumstances. He’s implicitly suggested, on any number of occasions, that Death, Famine, War and Conquest themselves couldn’t breach his “fortress.”

It doesn’t matter. This is over. In March, markets asked whether SVB was Bear Stearns. We can answer that question now: “No.” First Republic is Bear Stearns. In at least one sense, anyway.

Apparently, JPMorgan will recognize an upfront, one-time, post-tax gain of $2.6 billion in the deal. Over the next year and a half, the bank expects $2 billion in post-tax restructuring costs. Dimon expects the deal will be “modestly” accretive going forward. First Republic’s businesses are seen bringing in $500 million of incremental net income per year for JPMorgan.

The FDIC said the Deposit Insurance Fund will probably take a $13 billion hit. “Treasury is encouraged that this institution was resolved with the least cost to the Deposit Insurance Fund, and in a manner that protected all depositors,” Janet Yellen remarked.

As for the $30 billion the nation’s largest banks, including JPMorgan, put into First Republic at Dimon’s urging in March, those term deposits will be “repaid post-close or eliminated in consolidation.”