How JP Morgan’s Dimon Won the First Republic Contract

NEW YORK, May 2 (Reuters) – JPMorgan Chase & Co ( JPM.N ) put its might behind First Republic Bank on March 12 as several U.S. banks grappled with a crisis of confidence, two sources said. $10 billion fund.

The JPMorgan facility did not prevent depositors from fleeing lenders. But it turned out to be the start of a series of events — some of which are reported here for the first time — that put JP Morgan and its chief executive Jamie Dimon in a key role in one of the most unusual US bank rescues. In recent years.

JP Morgan bought First Republic in a government auction on Monday, ending weeks of failed rescue efforts and discussions involving the most powerful Wall Street executives and U.S. officials. Contract talks went down to the wire, according to two sources familiar with the situation. Four bidders, including JP Morgan, reached the final round of bidding on Sunday night, a source said.

JP Morgan didn’t know it had won until 1.15am in New York, hours before the final bids. At one point late in the night, as Dimon and other senior executives awaited the outcome of their bid, silence from the Federal Deposit Insurance Corp (FDIC) made them think they had lost, one of the sources said.

The final deal, announced around 3:30 a.m., cements Dimon’s reputation as one of Wall Street’s most powerful bankers.

But the deal raised new questions about the dangers of having banks too big to fail, the quality of regulatory oversight of the banking sector and the Biden administration’s determination to keep corporations from becoming too powerful through deals.

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

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“The only worry we have is the unknown at the moment. JPM was already a big significant player, and now it’s able to position itself further 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 the capacity to serve our clients, which could be cities, schools, hospitals, governments; we bank the IMF, the World Bank,” the banker said in a conference call after the deal. “Anyone who thinks America shouldn’t have that can call me directly.”

The FDIC said earlier Monday that the resolution included a “highly competitive bidding process” and was a low-cost alternative to its deposit insurance fund.

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Banking crisis

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

The attraction of the First Republic was its wealthy clients, and it offered them preferential rates on mortgages and loans. Relying on the rich also made it more vulnerable – it had high levels of uninsured deposits.

In early March, a run on Silicon Valley banks spooked depositors and investors, sending them into the arms of institutions they thought were safe, and First Republic quickly became a target. The first quarter saw a flight of more than $100 billion, leaving it scrambling to raise cash.

Over the weekend of March 12, as regulators seized Silicon Valley Bank and Signature Bank and announced a series of emergency measures to bolster confidence in the system, First Republic said it had taken additional steps to access a total of $70 billion in funding. From JP Morgan.

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However, this assurance failed to calm the markets and the Republic’s shares fell again from the following day.

Reuters could not determine when, but at some point JPMorgan’s interest in First Republic grew beyond its role as an adviser to help the bank improve its finances. Part of its appeal: the lender’s roster of wealthy individuals that add to JPMorgan’s own private banking franchise.

However, the prevailing wisdom at the time 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 it from taking over a large bank. Acquisition of failed banks may be exempted from the rule.

JPMorgan has launched a process internally that has looked at various options for First Republic, including a takeover, according to a source familiar with the matter. The deal was dubbed “Jungle” internally, the source said.

Bank groups were kept separate, the source said. First Republic was advised by Lazard Ltd ( LAZ.N ).

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Top bidder

In March, several ideas were floated to save the bank. Dimon was one of the power brokers who discussed a package for big banks to pay $30 billion in deposits. Dimon was among the bankers who met at a forum in Washington after failing to improve confidence in the lender. JPM also proposed another idea, which was briefly considered, to form a consortium to buy the bank, two of the sources said earlier.

However, a major obstacle to a private sector deal was that the First Republic had billions of dollars of undisclosed losses on its books and would have to be financed if someone bought the bank.

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As the weeks progressed, regulators came at least once in late April and pulled the plug on the bank, a source said. The situation worsened last week after its shares went into free fall following earnings.

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

The race was down to four bidders late Sunday, a source said. Besides JPMorgan, PNC Financial Services Group ( PNC.N ), Citizens Financial Group Inc ( CFG.N ) and Fifth Third Bancorp ( FITB.O ) were also in the bidding, the sources said.

The auction dragged on overnight as the FDIC’s advisers scrutinized each bid on its merits, a source familiar with the matter said.

Each bidder is bidding for the entire bank and a portion of its assets, and the FDIC’s advisers are looking for the lowest cost deposit insurance fund.

JP Morgan employed more than 800 employees in the bank with due diligence. While partial bids by three other banks have had some traction in finding a solution for First Republic, none have been able to get JPMorgan’s pitch to buy the entire bank, one of the sources said.

Reporting by Anirban Sen, Nubur Anand, Isla Binny, David French, Saeed Azhar, Lanan Nguyen; Written by Megan Davis; Editing by Paridosh Bansal and Stephen Coates

Our Standards: Thomson Reuters Trust Principles.

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