The American authorities placed the bank under their control yesterday First Republic and resold most of it to JPMorgan Chasehoping in this way to put an end to the banking crisis episode that arose in March.

The institution was under intense pressure after the bankruptcies of two similar institutions in early March, Silicon Valley Bank and Signature.

“U.S. regulators’ decisive actions to seize First Republic Bank and facilitate its acquisition by JPMorgan Chase & Co. will protect depositors and ensure the banking system remains sound,” a spokeswoman said Monday. of the White House, Karine Jean-Pierre.

Jean-Pierre also said that there was “serious mismanagement” at the bank and that those responsible will be held accountable.

The jumbo mortgage loans to wealthy individuals that led to bankruptcy

In its article, Bloomberg explains how the American bank was led to bankruptcy and what is the mismanagement that the spokeswoman of the White House mentioned.

The “seed” of disaster was planted in the 1980s when First Republic president Jim Herbert – then a director of San Francisco Bancorp – had the idea to make unusually large loans with very favorable terms to wealthy individuals who wanted to buy expensive properties in the area

Years later, Herbert left San Francisco Bancorp and founded First Republic Bank, which began making jumbo mortgage loans – at low interest rates – to borrowers with high incomes and excellent credit. In fact, they usually didn’t have to start repaying the principal for a decade after taking out the loan.

During the coronavirus pandemic, demand for jumbo loans increased as wealthy buyers sought mortgage deals that would allow them to keep most of their money in higher-yielding investments. This “massive” grant helped First Republic double its assets in four years, but contributed to its downfall.

Its rescue plan and the “thorn” of jumbo loans

On March 16 – and while the bank’s stock had collapsed, following the collapse of SVB and Signature – 11 of the country’s biggest lenders joined together to pump $30 billion in deposits into First Republic for at least four months.

The cash dump was supposed to stabilize the bank, buying it enough time to find a buyer and avoid seizure by US regulators.

At the center of First Republic’s balance sheet was a $137 billion problem that made it a particularly difficult sell: a giant book of these low-interest (jumbo) mortgages, mixed with some others that had suffered a severe decline in value since the Federal Reserve began raising interest rates.

Earlier this year First Republic said its mortgage loans would be worth about $19 billion less than their face value if sold. It also had another $8 billion or so in other loan impairments, as well as unrealized bond losses.

The bank has been unable to come up with a satisfactory rescue plan, and when it confirmed last Monday that many customers had withdrawn their deposits in the first quarter of this year, totaling more than $100 billion, its stock plummeted.

At the close of the Stock Exchange on Friday, First Republic was now valued at just $654 million, while it was worth more than $20 billion at the start of the year and more than $40 billion at its peak in November 2021.

The authorities, who seemed reluctant to rush to bail out another bank, finally took action.

The FDIC and the Treasury Department asked banks for expressions of interest in the middle of last week, and on Friday they allowed a handful of them to access more financial information about First Republic.

The bidding process was “highly competitive” and resulted in a transaction “compliant with the lower cost requirement,” the FDIC said.

The next day

Based on the amount of assets ($229 billion as of April 13) of First Bank, this is the second largest bank failure in United States history (excluding investment banks such as Lehman Brothers) after Washington Mutual in September 2008.

Under the deal, JPMorgan will take all of the bank’s deposits, as well as “substantially” all of its assets, according to a statement from the Federal Deposit Insurance Corporation (FDIC).

As part of the deal, First Republic’s loans are to be revalued down, and the FDIC has agreed to absorb a portion of those losses: the agency estimates the deal will cost it about $13 billion.