You can ask why JPMorgan Chase agreed to buy the failed First Republic Bank out of regulatory receivership. But a better question might be, why not? As JPMorgan chairman and CEO Jamie Dimon explained in a company press release: “This acquisition modestly benefits our company overall, it is accretive to shareholders, it helps further advance our wealth strategy, and it is complementary to our existing franchise.”
In other words, no big deal. And it really isn’t a big deal compared to JPMorgan’s $3.7 trillion in assets at the end of March, which will now grow by roughly $200 billion thanks to the purchase of First Republic.
Of course, to anyone worried about the implications of too-big-to-fail institutions getting bigger, this acquisition adds roughly $200 billion of ballast to the argument.
Why did the FDIC choose JPMorgan Chase’s bid for First Republic?
It’s not often that CEOs enter high-profile bidding contests for things they expect to just “modestly benefit” their companies. But it’s also not often that a $3.7 trillion-asset bank gets instantaneous regulatory approval to gobble up substantially all the assets of a $229.1 billion-asset bank, plus about $100 billion in deposits, overnight.
The FDIC says the resolution of First Republic “involved a highly competitive bidding process and resulted in a transaction consistent with the least-cost requirements of the Federal Deposit Insurance Act.” As part of the deal, the FDIC and JPMorgan will share in the losses, but also in any potential recoveries, on residential and commercial loans made by First Republic. JPMorgan Chase will not be assuming First Republic’s corporate debt or preferred stock.
Today (May 1), 84 First Republic offices in eight US states reopened as branches of JPMorgan Chase, and customers of the former First Republic will have “full access to all of their deposits,” the FDIC said.
All told, the FDIC estimates that the receivership of First Republic will cost its Deposit Insurance Fund, which is financed mainly by assessments on US banks, about $13 billion.
“Our government invited us and others to step up, and we did,” Dimon said in JPMorgan Chase’s statement about the deal. “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.”
Memories of Bear Stearns, WaMu
Dimon worked closely with US Treasury secretary Janet Yellen in March to drum up a combined $30 billion deposited into First Republic by 11 big US banks.
The rescue attempt failed. On April 24, First Republic disclosed that customers had yanked more than $100 billion in deposits from the bank in the first quarter, triggering another crash in First Republic shares and ultimately landing the bank in receivership. And Dimon once again was there to assist.
A full-blown acquisition of a bank is far riskier than a deposit infusion. Dimon, of all people, knows this. Over the years, he has made no secret of his regrets over buying Bear Stearns and Washington Mutual in 2008.
While those acquisitions burnished his role as the white knight of banking, riding to the rescue of troubled institutions that otherwise posed risks to the broader financial system, they also opened his company to billions of dollars in unforeseen legal costs. As Dimon wrote in 2015 in a letter to shareholders (pdf):
No, we would not do something like Bear Stearns again—in fact, I don’t think our Board would let me take the call. The WaMu deal might still make sense but at a much lower price to make up for the ongoing legal uncertainty (including the government’s ability to take away our bargained-for indemnities). I did not, and perhaps could not, have anticipated such a turn of events. These are expensive lessons that I will not forget.
JPMorgan Chase shareholders are trusting that’s the case. And there is reason for them to be optimistic. Though caught up in a panic that seems contained to banks with unusually heavy amounts of uninsured deposits and balance sheets overburdened with interest rate risks, First Republic was in far better shape than most banks were in 2008, when many institutions were concentrated in toxic assets with low chances of recovery and high amounts of legal risk.
“You’re basically getting a very clean bank in the most clean way you can get it,” Dimon said on a conference call this morning with Wall Street analysts.
JPMorgan shares are responding positively to the First Republic news
JPMorgan Chase says it will take a $2.6 billion one-time gain tied to the transaction, but also $2 billion in related restructuring costs spread across 2023 and 2024. Excluding those items, the acquisition is expected to add more than $500 million a year to JPMorgan’s net income.
The acquisition also nets JPMorgan former Republic branches in hot markets like New York and San Francisco, plus teams of bankers who are known for delivering high-touch service to high-net-worth clients.
If there’s one aspect of the deal JPMorgan isn’t entirely comfortable with, particularly given its past adventures with Bear Stearns and Washington Mutual, it’s First Republic’s book of mortgage loans. But here, too, Dimon has protections baked into the deal, between the FDIC agreeing, as is typical in deals like this, to cover 80% of the loss on any residential or commercial real estate loans from First Republic’s portfolio, and JPMorgan Chase’s plan to mark down the value of the acquired loans—meaning there’s more upside to be had if it sells the loans.
“You know I’m not a fan of putting mortgages on the balances,” Dimon said on the analyst call. “These are pristine loans … the loans themselves are really credit worthy, and being marked you’re obviously going to have a lot higher return going forward.”
In a sign of investor confidence in the move, JPMorgan shares were up 2.6% at $141.82 in midafternoon trading in New York.
This story has been updated to add comments from CEO Jamie Dimon and other details from JPMorgan Chase’s conference call with analysts.