A consortium of 11 giant banks that are ostensibly in competition with one another came together Thursday to bail out one of their own, the California-based First Republic, in order to help stabilize the teetering U.S. financial system.
The $30 billion transfer to First Republic by banks including JPMorgan, Citigroup and other banking juggernauts that were deemed “too big to fail” in the wake of the 2008 financial crisis is spurring a flight of deposits away from smaller lenders.
It is also raising eyebrows about the relationship between Wall Street and the federal government.
The private-sector rescue came just days after a public-sector bailout of Silicon Valley Bank (SVB) and Signature Bank by the Federal Deposit Insurance Corporation (FDIC), Federal Reserve and Treasury Department.
In that deal, taxpayer money is being used to backstop a federal line of credit extended to ailing banks.
Administration officials maintain the move to save First Republic was done at the initiative of the financial sector, but multiple outlets reported that Treasury Secretary Janet Yellen leaned on JPMorgan CEO Jamie Dimon to get the deal done.
The effects of the news on the beleaguered First Republic, which had at one point lost 80 percent of its share value since Monday, were immediate.
First Republic stock rose 10 percent on news of the rescue package on Thursday but was down more than 30 percent during trading on Friday.
Here’s what you need to know about the latest bank rescue and what it means for the relationship between the government and big finance.
A call for consequences: Biden urges Congress to crack down on failed bank executives
Private banks say the bailout was their idea, but reporting indicates otherwise
Representatives for the banking industry told The Hill that the $30 billion bailout for First Republic was the banks’ idea and that the move was designed to stabilize the financial sector in the interests of the broader economy.
The economy has been under pressure from eight consecutive interest rate hikes by the Federal Reserve.
U.S. officials have repeated this line, saying they’re supportive of the move but not responsible for it.
“This show of support by a group of large banks is most welcome, and demonstrates the resilience of the banking system,” a Thursday statement from the Treasury and other government agencies reads.
But reporting by The New York Times and other outlets indicates that the private-sector bailout was Yellen’s idea and that she suggested it to JPMorgan’s Dimon, who then corralled industry leaders to pony up the funds.
A rescue in real-time: Megabanks bail out First Republic
“Despite still feeling bruised by the fallout from JPMorgan’s rescues of Washington Mutual and Bear Stearns during the 2008 financial crisis, Dimon started calling other C.E.O.s to raise the money,” the Times reported in its Dealbook newsletter on Friday.
“Jamie Dimon and Janet Yellen were on a call Tuesday, when she floated an idea: What if the nation’s largest lenders deposited billions of dollars into First Republic Bank, the latest firm getting nudged toward the brink by a depositor panic,” Bloomberg News reported Thursday.
The rescue avoided another appeal to taxpayer funds
The private rescue takes taxpayers off the hook for yet another bank failure, just days after their money was put up to insure rich depositors from the venture capital industry at SVB.
Political blowback from a second round of public bank bailouts may have been what the Biden administration was trying to avoid in asking private bankers for their help.
“This First Republic thing, it’s disappointing,” former FDIC Chairwoman Sheila Bair said on the CNBC television network on Friday. “I’m glad at least they didn’t use government support, that the private banks came in to try to stabilize it, but it’s not clear it’s working. The problem is with this that fear becomes the major issue.”
“This is a classic Jimmy Stewart problem,” she added, referring to the famous pop culture example of a bank run in the classic Christmas film “It’s a Wonderful Life.”
Nobody likes bailouts? ‘Unfortunate and wrong’: Angry taxpayers respond to latest bank bailouts
Bair said that people need to understand that deposits in a bank aren’t simply locked up safe, but are reinvested in ventures that carry varying degrees of risk.
Billionaire investor Bill Ackman called the rescue of First Republic “bad policy” in a tweet on Thursday and insinuated that assurances about taxpayer money were being made behind the scenes.
“Spreading the risk of financial contagion to achieve a false sense of confidence in [First Republic Bank] is bad policy,” he wrote. “The [systemically important banks] would never have made this low return investment in deposits unless they were pressured to do so and without assurances that [First Republic Bank] deposits would be backstopped if it failed.”
Other financiers disagreed, stressing the commercial nature of the consortium’s investment.
“It’s a commercial transaction, it’s the right thing to do. Yes, it was encouraged by Treasury and the Fed, but it’s the right thing to do, and quite frankly they’re being paid for it. So it’s not a bailout,” Westwood Capital founder Dan Alpert said in an interview with The Hill.
“Borrowing deposits from other banks is hardly anything new. Broker deposits are something that’s been going on forever. Clearly there is a desire for liquidity in various institutions and for an increase in deposits, but the fact is there are excess deposits at many banks,” he added.
Smaller banks are fuming mad
Smaller and midsize banks are furious after Yellen told Congress this week that only the big banks would be backstopped by taxpayers and not the $23 trillion banking industry as a whole.
“The nation’s community banks denounce today’s statements from Treasury Secretary Janet Yellen that uninsured deposits will be protected only at systemically risky banks, which is a bailout for big banks that rewards mismanagement and risky behavior,” Rebeca Romero Rainey, president of the Independent Community Bankers of America, said in a statement on Thursday.
Ironically, investors are noting that the seemingly charitable move toward First Republic by JPMorgan and others can end up helping their businesses by making them appear as reliable as the federal government.
“Let’s face it. The large banks have been enormous beneficiaries of the last week,” Alpert said. “I can’t tell you how many businesses I know that have run from all these little small banks, basically every bank that’s below the top five and have pulled their money and moved it over to JPMorgan or any bank in the top five.”
“This has been ridiculous,” he said. “People have panicked, unnecessarily, mind you. It’s been crazy, it’s been completely lunatic.”
Taxpayers are still angry about financial sector bailouts
New polling by Ipsos released this week on attitudes toward bank bailouts shows that a large majority of Americans believe that taxpayers shouldn’t be on the hook for banks that collapse
“84 percent of Americans agree – 56 percent agree strongly – that taxpayers should not have to foot the bill for irresponsible bank management, including 85 percent of Democrats and 86 percent of Republicans,” the poll found.
More background: What you need to know about this week’s banking crisis
But the polling also found that 49 percent of Americans are “in favor of government bailouts of U.S. financial institutions,” up from 37 percent in 2012.
“We live in capitalism, so we can’t have our economy tanked,” Ellen McTigue, a retired nurse practitioner from New York, told The Hill in an interview. “I just sort of feel like, where is this really going?”
Could taxpayers be called upon to backstop the entire banking system yet again?
The White House put out a statement on Friday saying that Congress should allow the FDIC to punish the executives of failed banks more severely, docking their pay and banning them from future banking work.
But the president didn’t weigh in on whether Congress should be called upon to make the FDIC backstop the entire banking sector, and all deposits in the industry above $250,000, as it did with SVB.
Former FDIC Chairwoman Bair said Friday this should only happen if “true systemic problems with uninsured deposit runs” start to occur.
Picking up the tab: Here’s who is paying to restore Silicon Valley, Signature Bank deposits
“We did it during the Great Financial Crisis. It would be temporary,” Bair said. “Obviously, you should charge banks an extra premium for providing the coverage. Look, I don’t like bailouts of any sort, so I would only do this if they’re seeing true systemic problems with uninsured deposit runs.”
Rep. Blaine Luetkemeyer (R-Mo.), a member of the House Financial Services Committee, told Politico Wednesday that the Congress should in fact insure all bank deposits on a temporary basis.
“If you don’t do this, there’s going to be a run on your smaller banks,” he said. “Everyone’s going to take their money out and run to the JPMorgan’s and these too-big-to-fail banks, and they’re going to get bigger and everybody else is going to get smaller and weaker, and it’s going to really be bad for our system.”