A consortium of 11 giant banks, ostensibly in competition with each other, came together on Thursday to bail out their own, California-based First Republic, to help stabilize the shaky US financial system.
The transfer of $30 billion to First Republic by banks such as JPMorgan, Citigroup and other banking juggernauts deemed “too big to fail” after the 2008 financial crisis will spur a flight of deposits away 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 the public sector bailouts of Silicon Valley Bank (SVB) and Signature Bank by the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve and the Treasury Department.
In this deal, taxpayer money is used to block the federal credit limit granted to troubled banks.
Administration officials insist the bailout of the First Republic was initiated by the financial sector, but multiple outlets report that Treasury Secretary Janet Yellen leaned on JPMorgan CEO Jamie Dimon to get the deal done.
The impact of the news on beleaguered First Republic, which at one point had lost 80 percent of its stock value since Monday, was immediate.
First Republic stock rose 10 percent on the bailout Thursday, but fell more than 30 percent during Friday trading.
Here’s what you need to know about the latest bank bailout and what it means for the relationship between the government and the big economy.
Call for consequences: Biden urges Congress to crack down on failed bank executives
Private banks say the bailout was their idea, but reports suggest otherwise
Banking industry representatives told The Hill that the $30 billion bailout for First Republic was the banks’ idea and that the move was intended to stabilize the financial sector in the interests of the broader economy.
The economy has been under the pressure of eight consecutive interest rate hikes by the US Federal Reserve.
US officials have echoed that line, saying they support the change 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,” the Treasury and other government agencies said in a statement on Thursday.
But reports in the New York Times and other outlets indicate that the private-sector bailout was Yellen’s idea, and that she proposed it to JPMorgan’s Dimon, who then pushed industry leaders to raise funds.
Rescue in real time: Megabanks bails out First Republic
“Despite being bailed out by JPMorgan’s Washington Mutual and Bear Stearns during the 2008 financial crisis, Dimon began calling other CEOs to raise money,” the Times reported in its Dealbook newsletter on Friday.
“Jamie Dimon and Janet Yellen called Tuesday when he floated an idea: What if the nation’s biggest lenders deposited billions of dollars into First Republic Bank, the latest venture to teeter on the brink of a depositor panic,” Bloomberg News reported. Thursday.
The bailout avoided another appeal for taxpayer funds
A private bailout will bail taxpayers out of another bank failure, just days after their money was put to insure wealthy depositors in SVB’s venture capital sector.
The political backlash from another round of public bank bailouts may have been what the Biden administration was trying to avoid when it sought help from private bankers.
“This First Republic thing is disappointing,” former FDIC Chair Sheila Bair said on the CNBC television network Friday. “I’m glad that at least they didn’t use government support, that private banks came in to try to stabilize it, but it’s not clear that it’s working. The problem here is that fear becomes the main thing.”
“This is a classic Jimmy Stewart problem,” he added, referring to the famous pop culture example of a bank heist in the classic Christmas movie “It’s a Wonderful Life.”
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Bair said people need to understand that bank deposits are not simply being locked away in safety, but are being reinvested in projects with varying degrees of risk.
Billionaire investor Bill Ackman called First Republic to the rescue “bad politics” in a tweet on Thursday and hinted that behind the scenes insurance was provided on taxpayers’ money.
“Spreading the risk of financial contagion to create a false sense of confidence [First Republic Bank] is bad politics,” he wrote. “The [systemically important banks] would never have made such a low return investment in deposits if they had not been pressured to do so and without any guarantees [First Republic Bank] deposits will be blocked if it fails.”
Other financiers disagreed and emphasized the commercial nature of the consortium’s investment.
“It’s a commercial deal, it’s the right way to do it. Yes, the Treasury and the Fed encouraged it, but it’s the right thing to do, and frankly, they get paid to do 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 have been going on forever. There is clearly a desire for liquidity in various institutions and an increase in deposits, but the fact is that many banks have excess deposits, he added.
Smaller banks are angry
Smaller and mid-sized banks are furious after Yellen told Congress this week that taxpayers would only be subsidizing the big banks and not the $23 trillion banking industry as a whole.
“The nation’s community banks are condemning Treasury Secretary Janet Yellen’s statements today that uninsured deposits will be protected only at systemically risky banks, a bailout for big banks that rewards mismanagement and risky behavior,” Rebeca Romero Rainey, president of Independent Community Bankers. in America, said in a statement Thursday.
Ironically, investors note that JPMorgan and others’ ostensibly philanthropic move to First Republic may end up helping their companies by making them appear as trustworthy as the federal government.
“Frankly, the big banks have been the huge beneficiaries of the last week,” Alpert said. “I can’t tell you how many companies I know that have spun out of all these tiny little banks, basically all the banks below the top five banks, that have pulled their money and transferred it to JPMorgan or any of the top five banks.”
“This has been ridiculous,” he said. “People have panicked unnecessarily, mind you. It’s been crazy, it’s been absolutely crazy.”
Taxpayers are still angry about financial sector bailouts
A new poll released this week by Ipsos on attitudes toward bank bailouts shows a large majority of Americans believe taxpayers should not be on the hook for failing banks.
“Eighty-four percent of Americans agree — with 56 percent strongly agree — that taxpayers should not have to foot the bill for irresponsible banking, 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 polls also showed that 49 percent of Americans favor “government bailouts of U.S. financial institutions,” up from 37 percent in 2012.
“We live in capitalism, so we can’t have our economy blocked,” Ellen McTigue, a retired nurse from New York, told The Hill in an interview. “I just feel like where is this really going?”
Can taxpayers be asked to block the entire banking system again?
The White House issued a statement Friday saying Congress should allow the FDIC to punish the executives of failed banks more severely, docking their pay and barring them from future banking jobs.
But the president did not take a position on whether Congress should be required to make the FDIC a cover for the entire banking sector and all deposits in the industry over $250,000, as it did with SVB.
Bair, the former chairman of the FDIC, said Friday that this should only happen if “real systemic problems with uninsured deposits” begin to emerge.
Picking up the tab: Here’s who’s paying to return Silicon Valley’s 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 coverage. Look, I don’t like bailouts of any kind, so I would only do this if they see real systemic problems with uninsured deposits.”
House Financial Services Committee Rep. Blaine Luetkemeyer (R-Mo.) told Politico on Wednesday that Congress should in fact temporarily insure all bank deposits.
“If you don’t do this, the smaller banks will be forced out,” he said. “Everybody’s going to take their money out and run to JPMorgan and the 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 be really bad for our system.”
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