First Republic sold

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LOS ANGELES — Greetings from the City of Angels, where your host is enjoying the fruits of his native state (tacos, good donuts, In-N-Out, etc.) and mentally preparing to hear the takes of the political and financial elite at the Milken Institute’s Global Conference in Beverly Hills.


It is a very uncertain time for both the economy and markets. There’s a non-zero chance the U.S. defaults on its bonds later this summer. Regional banks are teetering. Deglobalization and onshoring have shaken up geopolitics and traditional alliances. The 2024 presidential campaign is now underway. All of this will be top of mind as power brokers descend on the Beverly Hilton to publicly opine and make small talk by the pool.

But a lot of the chatter, at least on day one, will have to do with First Republic Bank.

The FDIC early Monday morning announced JPMorgan Chase has purchased First Republic, which had limped along for weeks after being hit with the kind of massive deposit outflows that claimed two other regional lenders in March.

Victoria Guida: Regulators had scrambled all weekend to complete a deal to sell the embattled San Francisco-based lender to head off any further market turmoil. California’s state bank regulator shut down the bank overnight and appointed the FDIC as receiver. That cleared the way for a sale to JPMorgan, which will take on all deposits and substantially all assets.

First Republic’s demise is the latest fallout from the collapse of Silicon Valley Bank in March, which sparked runs at similar institutions, including Signature Bank, which failed the same weekend. The FDIC will share some of the losses from First Republic’s portfolio of residential mortgages and commercial loans, and provide $50 billion in financing for the buyer, according to a press release from JPMorgan. The agency said it expects a $13 billion hit to its deposit insurance fund, which is financed by fees from banks.

In its release, JPMorgan said it has bought $173 billion in loans and $30 billion in securities. It will also assume $92 billion in deposits, “including $30 billion of large bank deposits, which will be repaid post-close or eliminated in consolidation.”

The First Republic saga will also create fresh headaches for Federal Reserve Chair Jerome Powell. So far, Fed officials have presented a fairly united front when it came to raising rates over the last year. But with the financial sector now showing signs of strain, the Fed is under pressure to hit pause on pushing up borrowing costs.

Will that happen? Probably not. CME’s FedWatch tool pegged the likelihood of a quarter point hike at about 85 percent as of Sunday night. And as Omair Sharif, president of Inflation Insights, pointed out after the release of the Employment Cost Index on Friday, the steady growth of private wages and salaries in the first quarter should be enough to convince any dovish FOMC members to support at least one more hike.

If you’re bouncing around Los Angeles this week and have opinions about any of this, I’d love to hear them. Maybe by the pool. Maybe over donuts. Hell, I’d even spring for a drink.

IT’S MONDAY — Zach and I are in LA all week. I’ll be flying solo on MM while Zach heads up Global Insider (read that here). Send tips, gossip and suggestions to Sam at [email protected] and Zach at [email protected].

Driving the Week

Today at Milken: IMF Managing Director Kristalina Georgieva speaks at 11 a.m. … CFTC Chair Rostin Behnam speaks at 5:30 p.m. … Rep. Maxine Waters (D-Calif.) speaks at 5:30 p.m. … House Financial Services Chair Patrick McHenry speaks at 7:30 p.m. … TUESDAY … Job openings data will be released at 10 a.m. … Senate Agriculture has a hearing on commodity programs and credit at 9 a.m. … Senate Banking has a flood insurance hearing at 10 a.m. … Senate Banking has a hearing on rural housing at 2:45 p.m. … WEDNESDAY … The Fed will release its interest rate decision at 2 p.m., followed by Powell’s press conference … World Bank President David Malpass speaks at 2:30 p.m. at Milken … THURSDAY … Senate Banking has a hearing on bank failures at 10 a.m. … FRIDAY … The April jobs report will be out at 8:30 a.m. …

Trouble ahead — Our Hannah Brenton: “The world’s financial system needs a “massive adjustment” to cope with higher interest rates, and key rules will have to be revisited … Klaas Knot, chair of the Financial Stability Board, an international standard-setting body, told POLITICO that rising interest rates fueled problems at several regional U.S. banks and similar losses may show up elsewhere.”

Oh yeah, the debt limit — Our Kelly Garrity: “Neither Democrats nor Republicans seem to have adjusted their positions on the debt ceiling Sunday despite House Republicans having passed a sweeping debt-limit and spending-cuts plan on Wednesday.”

— House Majority Whip Tom Emmer (R-Minn.) tried to play down claims that the GOP’s debt limit and spending bill is non-starter in the upper chamber on Sunday, our Dave Cohen reports. “To say it’s dead on arrival in the Senate, when you’ve got even Joe Manchin suggesting support for this type of approach, I think that’s not exactly accurate,” Emmer said on CNN’s ‘State of the Union,’ referring to the West Virginia Democrat.

Epstein — The WSJ’s Khadeeja Safdar and David Benoit: “The nation’s spy chief, a longtime college president and top women in finance. The circle of people who associated with Jeffrey Epstein years after he was a convicted sex offender is wider than previously reported, according to a trove of documents that include his schedules.”

Regulatory Corner

Dissecting the failed banks — Michael Barr’s post-mortem on Silicon Valley Bank stirred up a political firestorm over the Fed vice chair’s plans to prevent future bank failures. In the 102-page report – which blamed his predecessor Randy Quarles for creating a culture of overly cautious bank supervisors — Barr said he planned to explore changes that would create tougher standards for regional banks, rein in the use of debt and tighten oversight of bank executive compensation, writes Victoria. Unsurprisingly, Barr’s findings were praised by progressive watchdogs and Democrats like Sen. Elizabeth Warren (D-Mass.), who’s tried to rally her party around legislation that would undo a Trump-era law that rolled back parts of Dodd-Frank.

House Financial Services Chair Patrick McHenry (R-N.C.) labeled the report a ““thinly veiled attempt to validate the Biden Administration and Congressional Democrats’ calls for more regulation.” Quarles blasted Barr’s criticism of his stewardship in a statement as well.

Meanwhile, the FDIC chalked up poor management – including its decision to dive into crypto markets — for Signature Bank’s failure, Katy O’Donnell reported on Friday. With that said, the banking regulator acknowledged that “in retrospect, [it] could have escalated supervisory actions sooner.” Another factor? Staffing shortages in the FDIC’s New York office, according to Bloomberg.

The uncertainty around the banking sector has started to dent perceptions of the U.S. economy, according to survey data shared by Edelman Smithfield. Nearly a quarter of those interviewed said they would look for an alternative bank to place their deposits in the wake of SVB and Signature Bank’s failures. An overwhelming majority, 80 percent, said the news “makes them concerned about the future of the U.S. economy,” according to the survey.

The OCC — Bloomberg’s Katanga Johnson: “One question looming over First Republic Bank’s emergency auction this weekend is whether giant bidder JPMorgan Chase & Co. would be granted a rare exception to rules forbidding banks that hold more than 10% of US deposits from buying competitors. An answer could come fast. Behind the scenes, the Office of the Comptroller of the Currency is standing by to quickly vet a deal and render a verdict.”

First in MM: State treasurers back private markets reform — Much of Wall Street is in a panic about SEC Chair Gary Gensler’s coming crackdown on private equity giants and hedge funds. But nine state treasurers stretching from Nevada to Illinois to Massachusetts are throwing their weight behind the “critically important” proposal. In a new statement shared with MM, the group said that new efficiency and transparency in the market “could mean tens of billions of dollars in savings for retirement funds.” – Declan Harty

— Also from Declan: “The SEC on Friday reopened comments on a plan to force public-company investors to reveal large stakes earlier than they’re required to do now.”

In the markets

Insulation — The WSJ’s Eric Wallerstein: “For some investors, markets are almost too quiet … Below the surface, some also point to another factor: The Federal Reserve’s balance sheet, loaded with bonds purchased to support the economy during crises, might be insulating Wall Street from the effects of its interest-rate policy.”

Mostly say ‘no’ — With labor markets tight, large employers – including the federal government — have relaxed rules around drug testing, writes The NYT’s Ernesto Londoño.

Downtown — The NYT’s Thomas Fuller and Sharon LaFraniere: The closure of a downtown Whole Foods “seemed to be the latest indicator of San Francisco’s faltering economic prospects, providing more grist for an ongoing debate over where the city is headed after tying its fate to the tech industry.”