Inside First Republic Bank’s $30 Billion Rescue

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The $30 billion rescue of began with a series of phone calls Tuesday between JPMorgan Chase CEO Jamie Dimon, Federal Reserve Chairman Jerome Powell and Treasury Secretary Janet Yellen.

Dimon was in Washington, according to a person familiar with the events, and he wanted to discuss some issues related to bank capital. The topic soon turned to the fate of the country’s 14th largest bank.

Shares of the San Francisco lender had been falling since last week’s failure of the Santa Clara-based bank, and $70 billion in funding from JPMorgan Chase and the Federal Reserve announced on Sunday The night failed to ease the pressure as the week began. The stock dropped 62% on Monday.

The Fed chair and Treasury secretary began the brainstorming, according to people familiar with the discussions, with input from Martin Gruenberg, chairman of another powerful regulator: the Federal Deposit Insurance Corporation, the CEO of the nation’s largest bank. His idea? JP Morgan may offer some deposits to First Republic.

Such an infusion can help solve a major concern. Deposit withdrawals put pressure on Bank and made it impossible to stand on its own. Last Thursday, customers withdrew $42 billion in just one day, leaving the bank with negative cash balances, and regulators seized the bank on Friday. The worry was that the same might happen to the First Republic.

The next day, Dimon pitched the idea to some of his colleagues. At an event at the Bank Policy Institute, he approached other executives, including Citigroup CEO Jane Fraser, and soon collected $5 billion in uninsured deposits from Citigroup (C), Bank of America (BAC) and Wells Fargo (WFC). Committed to JP Morgan has also agreed to put in $5 billion.

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Jamie Dimon, Chairman and CEO of JPMorgan Chase & Co., testifies at a Senate Banking Committee hearing in 2022. (AP Photo/Jacqueline Martin)

An investment of $20 billion was thought to be sufficient, but these four banks decided on Wednesday and Thursday to seek more from smaller rivals. US Bancorp (USB), Truist (TFC), PNC (PNC), State Street (STT) and Bank of New York Mellon (BK) each agreed to deposit $1 billion. Goldman Sachs (GS) and Morgan Stanley (MS) were the last to get involved, according to people familiar with the developments. They agreed to deposit $2.5 billion each.

“A whole bunch of deposits flowed into the big banks in the last five days,” said one of the people familiar with the deal. “It’s basically recycling of capital.”

An effort to rescue one of the nation’s largest regional lenders put Dimon at the center of a national banking crisis for the second time in 15 years.

In 2008, he acted twice to help stabilize the financial system when JPMorgan Chase (JPM) bought New York investment bank Bear Stearns in March of that year, receiving a $29 billion backstop from the federal government, and again in September In the case of Seattle’s Washington Mutual, Washington Mutual in 2008, JPMorgan Chase bought out Seattle Thrift’s operations after regulators seized it. It is still the country’s biggest bank failure ever.

The two deals turned JPMorgan Chase into the nation’s largest coast-to-coast bank and gave it an even more powerful hand on Wall Street. He also linked it to years of legal and regulatory headaches. Dimon has said that if he could do it over again, he would not have bought Bear Stearns for those reasons.

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The $30 billion infusion announced on Thursday boosted First Republic’s shares, rising as much as 10% on the day. Powell, Yellen and Gruenberg said in a joint statement that “this show of support by a group of large banks is welcome, and demonstrates the resilience of the banking system.”

JPMorgan is not getting any special dispensation as part of the deal, according to one of the people familiar with the talks. “These deposits will be treated exactly like one’s uninsured deposits would be treated,” the person said. Deposits have to stay at First Republic for 120 days and earn interest at the same rate as existing depositors.

“The selfish part,” said this person, “is powering the banking industry, which lifts all the boats.”

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