This is why the too big to fail banks bailed out First Republic

A consortium of 11 giant banks ostensibly competing with each other came together Thursday to bail out one of their own, the California-based First Republic, to help stabilize the tottering US financial system.

The transfer of $30 billion to First Republic by banks including JPMorgan, Citigroup and other banking industries deemed “too big to fail” in the wake of the 2008 financial crisis is fueling a flight of deposits from smaller lenders.

It also raises eyebrows about the relationship between Wall Street and the federal government.

The private sector bailout came just days after a public sector bailout of Silicon Valley Bank (SVB) and Signature Bank by the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve and the Treasury Department.

In that deal, taxpayer money is used to support a federal line of credit being extended to distressed banks.

Government officials claim the move to bail out First Republic was at the initiative of the financial industry, but multiple outlets report that Treasury Secretary Janet Yellen leaned on JPMorgan CEO Jamie Dimon to close the deal.

The effects of the news on the beleaguered First Republic, which had lost 80 percent of its share value at one point since Monday, were immediate.

Shares of First Republic rose 10 percent on Thursday on news of the rescue package, but fell more than 30 percent in Friday trading.

Here’s what you need to know about the latest bank bailout and what it means for the government’s relationship with major financial institutions.

A call to consequences: Biden urges Congress to crack down on failed bank executives

Federal Reserve Chairman Jerome Powell arrives on Tuesday, March 7, 2023 to discuss his semiannual monetary policy report to Congress before the Senate Banking, Housing and Urban Affairs Committee.

Private banks say the bailout was their idea, but reports say otherwise

Banking industry representatives 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 interest of the wider economy.

The economy is under pressure from eight consecutive rate hikes by the Federal Reserve.

US officials have echoed this rule, saying they support the move but are not responsible for it.

“This show of support from a group of major banks is very welcome and demonstrates the resilience of the banking system,” a statement from the Treasury and other government agencies read on Thursday.

But coverage by the New York Times and other media indicates that the private sector bailout was Yellen’s idea and that she proposed it to JPMorgan’s Jamie Dimon, who then convened industry leaders to pitch the money.

A real-time rescue: Megabanks rescue First Republic

“Despite still feeling hurt by the fallout from JPMorgan’s bailouts of Washington Mutual and Bear Stearns during the 2008 financial crisis, Dimon began calling other CEOs to raise the money,” the Times reported Friday in its Dealbook- newsletter.

Jamie Dimon and Janet Yellen were on the phone Tuesday when she pitched an idea: What if the nation’s biggest lenders poured billions of dollars into First Republic Bank, the latest company pushed to the brink by panic? among depositors,” reported Bloomberg News. Thursday.

Treasury Secretary Janet Yellen arrives for a Senate Finance Committee hearing
Treasury Secretary Janet Yellen arrives on Thursday, March 16, 2023 for a Senate Finance Committee hearing to discuss President Biden’s 2024 budget. Annabelle Gordon

The rescue avoided another appeal to taxpayers’ money

The private bailout frees taxpayers from yet another bank failure just days after their money was used to insure wealthy venture capital sector savers with SVB.

Political backlash from a second round of public bank bailouts may have been what the Biden administration was trying to avoid by asking private bankers for their help.

“This First Republic thing, it’s disappointing,” former FDIC chair Sheila Bair said Friday on the CNBC television network. “In any case, I’m glad they didn’t use government support, that the private banks came to try and stabilize it, but it’s not clear that it’s working. The problem with this is that fear becomes the main problem.”

“This is a classic Jimmy Stewart problem,” she added, referring to the famous pop culture example of a bank run in the classic Christmas movie “It’s a Wonderful Life.”

Nobody likes rescues? ‘Unfortunate and wrong’: Angry taxpayers react to latest bank bailouts

Bair said people need to understand that deposits in a bank are not just locked away safely, but reinvested in ventures that carry different risks.

Billionaire investor Bill Ackman called the rescue of First Republic “bad policy” in a tweet on Thursday, insinuating that guarantees were being made behind the scenes about taxpayers’ money.

“Spreading the risk of financial contagion to create a false sense of confidence [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 with no guarantees that [First Republic Bank] deposits would be pushed back if it failed.”

Other financiers disagreed, emphasizing the commercial nature of the consortium’s investment.

“It is a commercial transaction, it is the right thing to do. Yes, it was encouraged by the Treasury and the Fed, but it’s the right thing to do, and frankly, they get paid to do it. So it’s not a bailout,” said Westwood Capital founder Dan Alpert in an interview with The Hill.

“Borrowing deposits from other banks is not new. Broker deposits are something that is going on forever. There is clearly a desire for liquidity in various institutions and for an increase in deposits, but the fact is that there are excess deposits in many banks,” he added.

FILE – The Treasury Department seal outside the Treasury Department building in Washington on May 4, 2021. (AP Photo/Patrick Semansky, file)

Smaller banks are furious

Smaller and medium-sized banks are outraged after Yellen told Congress this week that only the big banks would be held back by the taxpayer and not the $23 trillion banking industry as a whole.

“The country’s community banks reject today’s statements by Treasury Secretary Janet Yellen that uninsured deposits are protected only at systemic risk banks, which is a bailout for big banks that rewards mismanagement and risky behavior,” said Rebeca Romero Rainey, president of the Independent Community Bankers. of America, said in a statement Thursday.

Ironically, investors note that the seemingly charitable move to First Republic by JPMorgan and others may ultimately help their companies by making them appear as trustworthy as the federal government.

“Let’s be honest. The big banks have benefited enormously from the past week,” Alpert said. “I can’t tell you how many companies I know that have walked out of all these little little banks, basically every bank that’s below the top five and have taken their money and moved it to JPMorgan or any other 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 insane.

Taxpayers are still angry about the bailouts of the financial sector

A new Ipsos poll released this week on attitudes toward bank bailouts shows a large majority of Americans believe taxpayers shouldn’t be footing the bill when banks collapse

“84 percent of Americans agree — 56 percent strongly agree — that taxpayers should not foot the bill for irresponsible bank management, including 85 percent of Democrats and 86 percent of Republicans,” the poll said.

More background: What you need to know about this week’s banking crisis

But the poll also found that 49 percent of Americans are “for government bailouts of U.S. financial institutions,” compared to 37 percent in 2012.

“We live in capitalism, so we can’t sink our economy,” Ellen McTigue, a retired nurse practitioner from New York, told The Hill in an interview. “I just feel like, where is this really going?”

A sign labeled JP Morgan Chase and Co below the company's headquarters
JP Morgan was one of 11 banks to put together a rescue package for First Republic.

Could taxpayers be called upon to halt the entire banking system again?

The White House issued a statement on Friday saying Congress should allow the FDIC to more severely penalize the executives of failing banks, cutting their pay and prohibiting them from doing future banking work.

But the president didn’t weigh in on whether Congress should be called on to allow the FDIC to create a backstop for the entire banking sector and all industry deposits above $250,000, as it did with SVB.

Former FDIC Chairman Bair said on Friday that this should only happen if there are “real systemic problems with uninsured deposits.”

Getting the Tab: Here’s Who Pays to Restore Silicon Valley, Signature Bank Deposits

“We did it during the Great Financial Crisis. It would be temporary,” Bair said. “Obviously you have to charge banks an extra premium for providing the cover. Look, I don’t like bailouts of any kind so I would only do this if they see real systemic issues with uninsured deposits.”

Republican Blaine Luetkemeyer (R-Mo.) of the House Financial Services Committee told Politico Wednesday that Congress should, in effect, temporarily insure all bank deposits.

“Not doing this will create a run on your smaller banks,” he said. “Everyone is going to get their money out and into the JPMorgans and these banks that are too big to fail, and they’re going to get bigger and everyone else is going to get smaller and weaker, and it’s going to get really bad for our system.”

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