First Republic Accelerates the Banking Crisis

After a month of sweet nothings from lying policymakers, bank crashes are back with a boom as yet another top-20 bank, First Republic, fell into the hungry mouth of JPMorgan.

Just five weeks ago Janet Yellen gave a speech amid fears of regional banks collapsing where she said "The situation is stabilizing. And the U.S. banking system remains sound.” The New York Post at the time characterized it as “drooling happy talk.”

And, yes, it turns out Janet lied.

For those following along at home, this makes 5 major banks vanished in 50 days – Silicon Valley, SilverGate, Signature, Credit Suisse, and now First Republic. With PacWest and Western Alliance already on-deck.

So what happened to First Republic? They went through a concentrated version of what all US banks are going through – reckless Fed hikes that gutted their bond portfolios while driving businesses to bankruptcy. In fact, that’s actually the Fed’s stated goal, to crush jobs. So the loans go bad while the bonds are melting.

In First Republic’s case, those losses were big enough to scare depositors, who pulled $100 billion – over half of First Republic’s deposits. At which point a cartel of major banks parachuted in $30 billion, and First Republic announced emergency borrowings from the Fed and Treasury – meaning from you, whether you like it or not.

But it wasn’t nearly enough: earnings reports showed First Republic’s done, unable to service those loans. And the stock plunged, going from $115 to just 2 dollars and 33 cents late last night. Making the whole bank worth barely worth a Pentagon toilet.  

One major analyst guessed First Republic had a negative value of $14 billion – meaning they owe $14 billion more than they had.

Enter JP Morgan

And that’s when the mega-vulture of America’s financial system swooped in.

Morgan said it will take on all of First Republic’s deposits — about $92 billion — and most of its assets, amounting to $203 billion.

Taxpayers, of course, took a big hit: $13 billion in “shared losses” on the loans plus $50 billion in fresh financing. So Morgan booked an immediate two and a half billion dollar profit on the buy.

Meanwhile, the FDIC’s threadbare coverage, already scrounging to just 0.6% of all deposits, got even thinner. The FDIC had already lost $22 and a half billion on Silicon Valley Bank, most of which -- $19 billion – will be converted into what the FDIC calls a “special assessment.” Meaning a tax on your bank account. Which they’ll take from you slowly over the next 4 years, presumably so you don’t notice, because you don’t shear the sheep all at once.

Incidentally, Morgan taking on all deposits did avoid the uncomfortable conversation whether, in fact, all rich depositors in America have been pre-bailed out by Janet Yellen. Which would trigger the mother of all “special assessments.”

And, so, when the smoke cleared, yet another fast-living bank found a new home and it only cost you $63 billion, cash, to the largest bank in America.

The Next Dominos to Fall

Attention now turns to other regional banks, some of which are in almost as dire shape: in particular, Western Alliance ($69 billion in deposits) and PacWest ($41 billion), as well as First Horizon out of Memphis ($200 billion in deposits).

In fact, according to one Stanford study, hundreds of banks are in trouble because of the fastest rate hikes in 50 years. These crashed their bonds, impaired their loans, and vaporized the profits they were making paying depositors pennies.

In the words of one analyst, this isn’t individual banks runs, it’s “a run on the business model.”

Unfortunately, essentially every bank in America used that business model: loading up on expensive bonds to park the influx of pandemic-era deposits, then losing hundreds of billions as rates went up.

As a result, American banks are now sitting on at least $620 billion of unrealized, hidden, losses. First Republic was about 5% of that. So we’ve got 95% to go.

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