How JPMorgan turned First Republic’s nightmarish week into a dream scenario for shareholders

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We’re less than six months into 2023, and there have been three regional bank failures.

Silicon Valley Bank and Signature Bank in March, and on Monday, First Republic Bank was shut down by the California Department of Financial Protection and Innovation. Last week, I spoke with an analyst who pointed out that in addition to SVB’s bank run causing First Republic trouble, a decades-old business model of offering wealthy borrowers substantial mortgages, usually at low rates, wound up putting the bank in a vulnerable position amid the Fed’s rate hikes in the past year.

Now, JPMorgan Chase—the largest bank in the U.S.—has taken over First Republic, in a deal negotiated by regulators. JPMorgan will acquire the substantial majority of First Republic’s assets, including $173 billion of loans, $30 billion of securities, and $92 billion of deposits. How did JPMorgan position itself for such an acquisition?

My colleague Shawn Tully’s new report, “JPMorgan clears the First Republic wreckage—and notches a $92 billion coup for investors who love the deal,” provides insight. Congress passed a landmark law in 1994 that allowed America’s banks to merge across state lines with few restrictions, Tully explains. The total share of the nation’s deposits that any one entity could hold was limited to 10%, as well as restricting the percentage within a state to 30%.

“By 2014, the nation’s three largest players, JPMorgan Chase, Bank of America, and Wells Fargo, had grown quickly—in part via their respective rescues of Washington Mutual, Merrill Lynch, and Wachovia in the Great Financial Crisis—to exceed the 10% ceiling. Hence, the rule has essentially blocked the three behemoths from acquiring any rival lenders for a decade,” Tully writes. “The 1994 act, however, provided a loophole that allowed waivers from the 10% maximum for buyers that stepped up to rescue failing lenders that the FDIC stood poised to shut down.”

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JPMorgan benefited from this loophole when the banking giant purchased virtually all the assets of First Republic from the FDIC “clearing the wreckage from the second largest banking failure in U.S. history, a disaster exceeded in scale only by the 2008 collapse of WaMu,” Tully writes.

So what do JPMorgan shareholders have to gain? JPMorgan achieved “what looks like a coup for its shareholders that at the same time stabilized the shaky outlook for regional banks,” he writes.

For starters, the deal has already given JPMorgan’s stock a boost. The bank was able to land First Republic’s assets in an auction that included a number of rival bidders. “Despite the competitive nature of the purchase, CEO Jamie Dimon appears to have secured highly favorable terms. Start with those $92 billion in deposits. They’re far from the ‘hot money’ amassed from tech hotshots and super-high-net worth individuals that fled when the bad news started spreading.”

He continues, “Many of the customers parked their millions at First Republic because it provided them with inexpensive ‘jumbo’ home loans, a practice that Dimon declared dead on the conference calls where he and CFO Jeremy Barnum explained the transaction.” You can read more about what shareholders have to gain and how JPMorgan was already leading in the deposit wars here.

Sheryl Estrada
[email protected]

This story was originally featured on Fortune.com

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