How JPMorgan won the First Republic deal

New York— On March 12, as several US banks reeled from a crisis in confidence, JPMorgan Chase & Co put its might behind First Republic Bank, giving the troubled lender what two sources said was a $10bn financing.

The JPMorgan facility did not stop depositors from fleeing the lender. But it turned out to be the start of a series of events that put JPMorgan and its CEO, Jamie Dimon, in a pivotal role in one of the most extraordinary US bank rescues of recent years.

JPMorgan bought First Republic on Monday in a government auction, culminating weeks of failed rescue attempts and aborted discussions involving some of the most powerful Wall Street executives and US officials. The deal talks went down to the wire, according to two sources familiar with the situation. Four bidders, including JPMorgan, made it to the final rounds of the auction on Sunday night, one of the sources said.

JPMorgan did not know until about 1.15am in New York that it had won, even though final bids were initially due several hours earlier. At one point late at night, as Dimon and other senior executives waited for the outcome of their bid, silence from Federal Deposit Insurance Corp (FDIC) made them think they had lost, one of the sources said.

The final deal, announced around 3.30am, cements Dimon’s reputation as one of Wall Street’s most powerful bankers.

But the deal also raised fresh questions about the dangers of having banks that are too big to fail, the quality of regulatory oversight of the banking industry and the Biden administration’s resolve to keep corporations from becoming too powerful through deals.

Piper Sandler analysts said more than the finances, the deal was significant for JPMorgan as it solidified the bank “as the go-to industry leader in times of turmoil”.

“The only worry we have is the at present unknowable. JPM was already a hugely significant player that has now managed to make itself even more so at a time when 'too big to fail' is still a political concern,” they wrote.

Dimon pushed back against any suggestion that his bank was getting too big.

“We have capabilities to serve our clients, who can be cities, schools, hospitals, governments; we bank the IMF, the World Bank,” the banker said in a conference call after the deal. “And anyone who thinks the US should not have that can call me directly.”

The FDIC said earlier on Monday the resolution involved a “highly competitive bidding process”, and was the least costly alternative for its deposit insurance fund.

First Republic was founded in 1985 by James “Jim” Herbert, son of a community banker in Ohio. The bank was bought by Merrill Lynch in 2007 right before the financial crisis. It became public again in 2010, after Merrill Lynch itself was bought by Bank of America and the new owner decided to dispose of it.

First Republic’s attraction was its rich clients, and it gave them preferential rates on mortgages and loans. Its reliance on the rich also made it more vulnerable. It had a high level of uninsured deposits.

In early March, as a run on Silicon Valley Bank spooked depositors and investors, sending them into the arms of institutions they thought were safer, First Republic quickly became a target. It saw more than $100bn fleeing in the first quarter, leaving it scrambling to raise money.

By the weekend of March 12, as regulators seized Silicon Valley Bank and Signature Bank and announced a series of emergency measures to shore up confidence in the system, First Republic said it had taken additional steps to access a total of $70bn in funds, including from JPMorgan. The assurance, however, failed to calm markets, and First Republic's stock fell again the following day.

At some point JPMorgan’s interest in First Republic grew to become more than its role as an adviser helping the bank bolster its finances. Part of its attraction: the lender’s roster of wealthy individuals which would add to JPMorgan’s own private banking franchise.

Prevailing wisdom at the time, however, suggested that regulators would not allow JPMorgan to buy another bank. JPMorgan holds more than 10% of the nation’s total bank deposits, and federal law prevents a large bank from an acquisition that would put it above that threshold. Acquisitions of failed banks can be exempted from the rule.

JPMorgan started a process internally, which looked at various options for First Republic, including an acquisition, according to a source familiar with the matter. The deal was internally code-named “Forest”, the source said.

The bank kept the teams separate, the source said. First Republic also had Lazard as an adviser.

In March, a series of ideas were floated to save the bank. Dimon was among the power brokers that discussed a package by large banks to inject $30bn in deposits. After that failed to improve confidence in the lender, he was among bankers that met in Washington at a forum, where topics included aiming to work out details on what needed to be done. JPM proposed another idea that was briefly considered, of forming a consortium to buy the bank, two sources previously said.

A key hurdle to doing a private sector deal, however, was that there were billions of dollars of unrealised losses on First Republic’s books, and they would have to be funded if anyone bought the bank.

As weeks progressed, regulators came close at least once in late April to pulling the plug on the bank, one of the sources said. The situation became worse last week after its shares went into a free fall following earnings.

By Friday, the FDIC decided the bank had run out of time to find a private solution, a source previously told Reuters. Advised by Guggenheim Securities, the regulator reached out to various potential bidders, including banks and private equity firms, to solicit offers, two sources familiar with the situation said.

By late Sunday the race had narrowed to four bidders, one source said. Besides JPMorgan, PNC Financial Services Group, Citizens Financial Group and Fifth Third Bancorp were also in the auction, sources said.

The auction dragged out through the night as the FDIC’s advisers examined each bid on its merits, a source familiar with the matter said.

Each bidder put in bids for the whole bank as well as part of its assets, the source said, and the FDIC’s advisers were looking for the one which would cost the least to the depository insurance fund.

JPMorgan deployed more than 800 employees to do due diligence on the bank. While the partial bids from the three other banks held some attraction in finding a solution for First Republic, none could top JPMorgan’s pitch to buy the whole bank, one of the sources said.

Reuters