How JPMorgan’s Dimon Won the First Republic Deal

NEW YORK (Reuters) – On March 12, as several U.S. banks suffered a crisis of confidence, JPMorgan Chase & Co. put its might behind First Republic, giving the troubled lender what two sources said was $10 billion in financing.

JPMorgan’s facilities did not prevent depositors from fleeing the lender. But it turned out to be the beginning of a chain of events — some of the details of which are reported here for the first time — that put JPMorgan and its CEO, Jamie Dimon, in a pivotal role in one of the most extraordinary bailouts of American banks in recent years.

JPMorgan bought First Republic on Monday at a government auction, capping weeks of failed bailout attempts and aborted discussions between some of Wall Street’s most powerful executives and American officials. Two sources familiar with the situation said the deal talks had gone well. Four bidders, including JPMorgan, reached the final rounds of the auction on Sunday night, one of the sources said.

JPMorgan didn’t know until 1.15am in New York that it had won, even though the final bids were initially due several hours early. One source said that late at night, as Dimon and other senior executives waited for the outcome of their bid, silence from the FDIC made them think they lost.

The final deal, announced at about 3:30 a.m., cemented Dimon’s reputation as one of the most powerful bankers on Wall Street.

But the deal also raised new questions about the risks of banks that are too big to fail, the quality of regulatory oversight of the banking industry and the Biden administration’s determination to prevent companies from becoming too powerful through deals.

Piper Sandler analysts said the deal was more important to JPMorgan than finances because it cemented the bank “as the industry leader in times of turmoil.”

“The only concern we have is not being able to tell at present. JPM was already a very important 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 dismissed any suggestion that his bank had gotten too big.

“We have capabilities to serve our customers, which can be cities, schools, hospitals and governments; we are the bank of the International Monetary Fund and the World Bank,” the banker said on a conference call after the deal. “And anyone who thinks the United States should not have that can contact me directly.”

The FDIC said earlier Monday that the decision involved a “highly competitive bidding process” and was the lowest-cost alternative to the Deposit Insurance Fund.

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First Republic was founded in 1985 by James “Jim” Herbert, the son of an Ohio community banker. The bank was bought by Merrill Lynch in 2007 just before the financial crisis. It went public back in 2010, after Merrill Lynch itself was bought by Bank of America Corp (BAC.N) and the new owner decided to get rid of it.

First Republic was the attraction to its wealthy customers, and gave them preferential rates on mortgages and loans. Its dependence on the rich also made it more vulnerable – it had a high level of uninsured deposits.

In early March, when the Silicon Valley bank run sent depositors and investors into the arms of institutions they thought were safer, First Republic quickly became a target. It saw more than $100 billion flee in the first quarter, leaving it struggling to raise cash.

By the weekend of March 12, when regulators seized Silicon Valley Bank and Signature Bank and announced a series of emergency measures to boost confidence in the system, the First Republic said it had taken additional steps to access a total of $70 billion in funds, including from GB. Morgan.

However, the guarantee failed to calm the markets, and First Republic stock fell again the next day.

Reuters was unable to say when, but at some point JPMorgan’s interest in First Republic grew to be more than its role as an advisor helping the bank strengthen its finances. Part of its appeal: the lender’s roster of wealthy individuals that would add to JPMorgan’s private banking franchise.

However, the prevailing wisdom at the time indicated that regulators would not allow JPMorgan to buy another bank. JPMorgan owns more than 10% of all bank deposits in the country, and federal law prevents a major bank from a takeover that would put it above that limit. Failed bank takeovers can be exempt from the rule.

JPMorgan launched an internal process, which looked at various options for First Republic, including an acquisition, according to a source familiar with the matter. The source said the agreement is internally codenamed “Forest”.

The source said the bank kept the teams separate. First Republic also had Lazard Ltd (LAZ.N) as an advisor.

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In March, a series of ideas to save the bank were put forward. Dimon was among the powerbrokers who discussed a package of major banks to inject $30 billion in deposits. After this failed to improve confidence in the lender, Dimon was among the bankers who met in Washington for a forum, where topics included a view to working out details of what to do. Two sources said earlier that JPM Bank proposed another idea that was briefly considered, which is to form a consortium to buy the bank.

The main hurdle to closing a deal with the private sector was that there were billions of dollars of unrealized losses on First Republic’s books, which would have to be funded if anyone bought the bank.

As the weeks progressed, at least once in late April, regulators came close to pulling the plug on the bank, one source said. The situation got worse last week after its shares took a freefall after earnings.

By Friday, the FDIC had decided it had run out of time to find a private solution, a source previously told Reuters. Two sources familiar with the situation said the regulator, acting on advice from Guggenheim Securities, has reached out to various potential bidders, including banks and private equity firms, to solicit bids.

By late Sunday, the race had narrowed to four bidders, one source said. Besides JPMorgan, PNC Financial Services Group (BNCN), Citizens Financial Group (CFG.N) and Fifth Third Bancorp (FITB.O) participated in the auction, sources said.

A source familiar with the matter said the auction continued throughout the night as FDIC advisors scrutinized each bid on its merits.

The source said that each bidder submitted bids for the entire bank as well as a portion of its assets, and FDIC advisors were looking for the lowest cost option for the deposit insurance fund.

JPMorgan has deployed more than 800 employees to perform due diligence at the bank. One source said that while partial bids from the other three banks had some appeal in finding a solution for First Republic, none could beat JPMorgan to buy the entire bank.

(Covering) By Anirban Sen, Nupur Anand, Isla Penny, David French, Saeed Azhar, Lanan Nguyen; Written by Megan Davies. Editing by Paritosh Bansal and Stephen Coates

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