How JPMorgan’s Dimon won the First Republic deal

NEW YORK, May 2 (Reuters) – On March 12, as several U.S. banks emerged from a confidence crisis, JPMorgan Chase & Co ( JPM.N ) threw its might behind First Republic Bank, giving the troubled lender the two sources said was a $10 billion financing.

The JPMorgan facility did not stop depositors from fleeing the lender. But it turned out to be the start of a series of events — some details reported here for the first time — that put JPMorgan and its chief executive, Jamie Dimon, in a central role in one of the most extraordinary US bank rescues. In recent years.

JPMorgan bought First Republic on Monday in a public auction, culminating weeks of failed rescue attempts and aborted discussions involving some of Wall Street’s most powerful executives and US officials. The deal talks went down to the wire, according to two sources familiar with the situation. Four bidders, including JPMorgan, made it to the final rounds of the auction on Sunday night, one of the sources said.

JPMorgan did not know until 1:15 a.m. in New York that it had won, even though the final bids were originally due several hours earlier. At one point late in the evening, as Dimon and other top executives awaited the outcome of their bid, silence from the Federal Deposit Insurance Corp (FDIC) led them to believe 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 also raised new questions about the dangers of having too-big-to-fail banks, 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 that more than the financials, the deal was important to JPMorgan as it solidifies the bank “as the best industry leader in times of turmoil.”

“The only concern we have is the currently unknown. JPM was already a hugely significant 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 pushed back against any suggestion that his bank is getting too big.

“We have capabilities to serve our clients, which can be cities, schools, hospitals, governments; we bank the IMF, the World Bank,” the banker said in a conference call after the deal. “And anyone who thinks the United States shouldn’t have it can call me directly.”

The FDIC said earlier Monday that the resolution involved a “highly competitive bidding process” and was the least expensive option for the deposit insurance fund.

BANKING CRISIS

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

First Republic’s attraction was its wealthy customers, and it gave them preferential access to 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 a run on Silicon Valley Bank spooked depositors and investors, sending them 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, making it difficult to raise money.

By the weekend of March 12, when 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 funds, including from JPMorgan.

The insurance failed to calm the markets, however, and First Republic’s stock fell again the next day.

Reuters could not determine when, but at some point JPMorgan’s interest in First Republic grew to become more than an advisory role helping the bank strengthen its finances. Part of the attraction: the lender’s roster of wealthy individuals who will 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 has more than 10% of the nation’s total bank deposits, and federal law prevents a large bank from an acquisition that would put it above that threshold. Acquisitions of failed banks can be exempted from the rule.

JPMorgan started a process internally, which looked at various options for First Republic, including an acquisition, according to a source familiar with the matter. The deal was internally dubbed “Forest,” the source said.

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

TOP BIDDERS

In March, a number of ideas were floated to save the bank. Dimon was among the power brokers who discussed a package from major banks to inject $30 billion in deposits. After that failed to improve confidence in the lender, Dimon was among bankers who met in Washington for a forum, where topics included aiming to work out details of what needed to be done. JPM proposed another idea that was briefly considered, of forming a consortium to buy the bank, two sources said earlier.

However, a major obstacle to doing a private sector deal was that there were billions of dollars in unrealized losses on First Republic’s books, and they would have to be funded if someone bought the bank.

As the weeks went by, regulators came at least once in late April to pull the plug on the bank, one of the sources said. The situation worsened last week after the shares went into free fall after earnings.

On Friday, the FDIC determined that the bank had run out of time to find a private solution, a source previously told Reuters. Advised by Guggenheim Securities, the regulator reached out to various potential bidders, including banks and private equity firms, to solicit offers, two sources familiar with the situation said.

By the end of Sunday, the race had been reduced to four bidders, a source said. Besides JPMorgan, PNC Financial Services Group ( PNC.N ), Citizens Financial Group Inc ( CFG.N ) and Fifth Third Bancorp ( FITB.O ) also participated in the auction, sources have said.

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

Each bidder bid for the entire bank as well as parts of its assets, the source said, and the FDIC’s advisers were looking for the one that would cost the depository insurance fund the least.

JPMorgan deployed more than 800 employees to do due diligence on the bank. While the partial bids from the other three banks had some appeal to find a solution for First Republic, none could top JPMorgan’s pitch to buy the entire bank, one of the sources said.

Reporting by Anirban Sen, Nupur Anand, Isla Binnie, David French, Saeed Azhar, Lananh Nguyen; Written by Megan Davies; Editing by Paritosh Bansal and Stephen Coates

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