Money Rehab with Nicole Lapin - Another Bank Bites the Dust. What Happens Now?
Episode Date: May 3, 2023RIP First Republic. Nicole breaks down why First Republic failed, how the pieces are being picked up, and what it means for First Republic customers and investors. For a pulse check on your local bank..., check their Weiss rating here: https://weissratings.com/
Transcript
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One of the most stressful periods of my life was when I was in credit card debt.
I got to a point where I just knew that I had to get it under control for my financial future
and also for my mental health. We've all hit a point where we've realized it was time to make
some serious money moves. So take control of your finances by using a Chime checking account
with features like no maintenance fees, fee-free overdraft up to $200, or getting paid up to two
days early with direct deposit.
Learn more at Chime.com slash MNN. When you check out Chime, you'll see that you can overdraft up
to $200 with no fees. If you're an OG listener, you know about my infamous $35 overdraft fee that
I got from buying a $7 latte and how I am still very fired up about it. If I had Chime back then,
that wouldn't even be a story. Make your fall finances a little greener by working toward your financial goals with Chime.
Open your account in just two minutes at Chime.com slash MNN. That's Chime.com slash MNN.
Chime. Feels like progress.
Banking services and debit card provided by the Bancorp Bank N.A. or Stride Bank N.A.
Members FDIC. SpotMe eligibility requirements and overdraft
limits apply. Boosts are available to eligible Chime members enrolled in SpotMe and are subject
to monthly limits. Terms and conditions apply. Go to Chime.com slash disclosures for details.
I'm Nicole Lappin, the only financial expert you don't need a dictionary to understand.
It's time for some money rehab.
All right, we've got to talk about First Republic today. The big headline of the week,
of course, is that First Republic Bank was pronounced dead and JPMorgan Chase bought
the bank's $92 billion deposits and $203 billion in loans and other
securities. When I think about how this unfolded, I have a little daydream, and it goes like this.
Do you have an ex saved in your phone as, nope, or do not answer, or as I once did,
asshole, do not answer? Well, because of JPMorgan Chase CEO Jamie Dimon's debacle in 2008
with Bear Stearns, I picture his phone ringing with First Republic's contact changed to do not
answer. But he finally caved and picked up the call from First Republic this weekend. More on
Bear Stearns and First Republic in just a minute. But for a quick fun fact,
bailing out banks is actually one of the longstanding legacies of J.P. Morgan. And I'm
talking about the man here, not the bank. The legacy goes back to a series of bank runs known
as the Panic of 1907. To stop the financial system from collapsing then, J.P. Morgan, again, the guy,
financial system from collapsing then, J.P. Morgan, again, the guy, invited financial heavyweights in New York City to his office. And I am dead serious here. J.P. Morgan locked them in his office and
forced them to pool together 25 million bucks to prop up the financial system. And it worked.
He released them in the morning. The financial system was saved. and the panic of 1907 ended. So, net-net, J.P. Morgan,
the man and the company, has a history of stepping in to act as a backstop to the American economy.
So when in 2008, J.P. Morgan Chase, led by Jamie Dimon, bought a failing Bear Stearns to save the
banking system, he was just bringing this long-standing tradition into
a new century. At the time, the purchase of bear Stearns was viewed as a brilliant business move.
Diamond had negotiated a deal to pay $2 a share for the company, which had been trading at $170
a year prior. And while bear Stearns came with a lot of risk because many of its assets were subprime mortgages,
the Federal Reserve agreed to insulate JPMorgan Chase from some of those risks.
But alas, the deal was doomed. And while the bailout may have mitigated some of the impact
of the subprime mortgage crash, it didn't prevent the Great Recession. Worse yet,
the Bear Stearns deal came with a lot more legal risk
than J.P. Morgan had ever accounted for. Even seemingly simple things like selling the Bear
Stearns office for $1.1 billion landed J.P. Morgan Chase in court. Jamie Dimon has said
repeatedly that he regrets buying Bear Stearns and he wouldn't do it again. In fact, he's gone so far
as to say he doesn't even think the board of J.P. Morgan would let him take the call about buying a
failed bank. Well, the board must have been sleeping this weekend because Jamie Dimon and
J.P. Morgan have gone and done it again and purchased a failed bank. This time, First Republic.
and purchased a failed bank. This time, First Republic. To be fair, he tried to resist.
Diamond led a group of bankers who deposited $30 billion in First Republic back in March to try and keep it solvent. No word on if he had to lock them in his office to do it,
like J.P. Morgan did back in 1907. But that $30 billion was not enough to keep First Republic solvent.
Now, $30 billion is a lot of cash, so let's take a quick moment to address
why First Republic couldn't be propped up with that infusion of money.
As we know, when Silicon Valley Bank crashed, there was a panic that transcended SVB and
infected other banks, and really, the industry as a whole.
First Republic had a unique reputation as being the bank of choice for very high net worth
customers who enjoyed First Republic's lovely customer service. But despite the story of happy
customers at First Republic, the bank's financial filings revealed that even with the $30 billion boost,
clients had been steadily withdrawing their deposits and making those withdrawals faster
than the money was coming in. Ultimately, $102 billion flowed out of First Republic.
This made First Republic's position even more precarious. Like SVB, they had a lot of assets, like bonds,
that were premature and essentially not ready to sell for a good return. To make matters worse,
First Republic also had a lot of loans out to their high-net-worth customers. These were largely
in the form of low-interest-rate mortgages, which don't require payments toward the principal for
several years. In terms of risk profile, these loans are sort of the opposite of subprime mortgages.
It's reasonable to expect that the uber-wealthy clientele of First Republic will pay these loans
back, but it's going to be 30 years before they do so. And much like the Treasury's First Republic
invested in, these loans would sell for far less than their face value.
So First Republic had some assets that were also kind of liabilities, but it also had other assets
like physical banks, a trained workforce with established relationships with clients,
and a company culture that customers seemed to like. Altogether, the assets were valued at $186 billion, which hello,
duh, is a lot of money, so finding a buyer was going to be difficult.
But after going through the books and bidding against other banks, JP Morgan bought First
Republic for $182 billion, which is a bit of a discount, but not a huge one. We're still talking billions of dollars
here. The FDIC had also agreed to help assume some of the risk for the loans First Republic made,
which given the nature of these loans, isn't actually that much risk. And the FDIC loaned
JP Morgan $50 billion to make this purchase. You may be wondering, why does JPMorgan need a loan? They do have cash.
They are a bank. But as a bank, they need to keep a set amount of cash on hand in case of a bank run.
That's one of the issues that got us into this whole SVB First Republic mess in the first place.
And actually, by helping to guarantee these loans,
the FDIC is further helping J.P. Morgan adhere to banking regulations about capitalization,
which we like. Right now, this looks like a good deal for J.P. Morgan. But at the time,
so did Bear Stearns. But First Republic isn't facing the kinds of legal issues that cost J.P.
First Republic isn't facing the kinds of legal issues that cost J.P. Morgan so much money on the Bear Stearns deal. So if you're like me, you think this stuff is interesting,
but you also might be thinking, cool, cool, good for Jamie Dimon, but what does this mean for me?
Totally fair. So if you have a First Republic account or mortgage or stocks, what happens now?
Well, if you're a First Republic
customer now, congrats, you are a JPMorgan customer. All First Republic branches will
become JPMorgan Chase branches. The FDIC has actually had a fair amount of practice with this
after last month, and so corporate leadership is optimistic that there shouldn't be any major
issues. So I'd expect
growing pains of a fairly sizable transition, but you should be able to continue banking as normal
and please pay your mortgage, of course, on time. For homeowners out there, I would just get on the
phone with a human or go to a physical branch and confirm the instructions for paying your mortgage
throughout this transition. I know we're in 2023 and we don't want to talk to humans anymore. It's chat support or bust. But the last thing you
want to do is accidentally pay using the wrong instructions and get a credit score hit. Now,
if you had stock in First Republic, the transition will be smooth, but in a different way.
You now own nothing. There's no way to sugarcoat it. It sucks.
When trading was halted on Monday, the stock, along with First Republic Bank, basically stopped
existing. Right now, interestingly, it seems like most brokers allowed users to exercise their put
options. Nictionary note here, put options are a type of financial asset that allows you to make money when a stock's price drops. However, Robinhood, in a move that's very on brand for them,
is being accused now of forcing their users to allow their put options to expire worthless.
The lawsuits are sure to follow. And even if you weren't invested in First Republic,
if you invest in anything, which I hope you do, yesterday was probably a tough day for you. The market decided that it hated the news about First
Republic and dropped across the board. But not only that, stocks of several regional banks like
Comerica and Zion dropped significantly. The hardest hit banks were Western Alliance Bank
and PacWest Bank Corp. Their stocks dropped so quickly
that trading was actually halted on those companies' stocks to keep them from going into
freefall. That does not mean they will be the next to fail, or even any more banks will fail.
However, trading on First Republic stock was halted in April in an attempt to stabilize the price.
I never want to unduly panic anyone ever, but if you bank with any of these banks, it's
probably worth double checking, triple checking to make sure that your deposits are under
the 250K limit protected by the FDIC.
For today's tip, you can take straight to the bank.
If you're worried about your local bank,
there are some quick and easy ways to check up on its financial health. For example,
one thing you can do is check their Weiss rating. Weiss ratings are a fairly reliable,
well, not black swan proof, free service with reports on the financial health of banks and
credit unions. For all your Nancy Drewing needs here, I've linked Weiss in the
show notes. One of the most stressful periods of my life was when I was in credit card debt.
I got to a point where I just knew that I had to get it under control for my financial future
and also for my mental health. We've all hit a point where we've realized it was time to make
some serious money moves. So take control of your finances by using a Chime checking account with features like no maintenance fees, fee-free overdraft up to $200,
or getting paid up to two days early with direct deposit. Learn more at Chime.com slash MNN.
When you check out Chime, you'll see that you can overdraft up to $200 with no fees. If you're an
OG listener, you know about my infamous $35 overdraft fee that I got from
buying a $7 latte and how I am still very fired up about it. If I had Chime back then, that wouldn't
even be a story. Make your fall finances a little greener by working toward your financial goals
with Chime. Open your account in just two minutes at Chime.com slash MNN. That's Chime.com slash MNN.
Chime feels like progress.
Banking services and debit card provided by the Bancorp Bank N.A. or Stride Bank N.A.,
members FDIC. SpotMe eligibility requirements and overdraft limits apply. Boosts are available
to eligible Chime members enrolled in SpotMe and are subject to monthly limits. Terms and
conditions apply. Go to Chime.com slash disclosures for details.
Money Rehab is a production of Money News Network. I'm your host, Nicole Lappin.
Money Rehab's executive producer is Morgan Lavoie. Our researcher is Emily Holmes.
Do you need some money rehab? And let's be honest, we all do. So email us your money questions,
moneyrehab at moneynewsnetwork.com to potentially have your questions answered on the show or even have a one-on-one intervention with me. And follow us on Instagram at moneynews and TikTok at
moneynewsnetwork for exclusive video content. And lastly, thank you. No, seriously, thank you.
Thank you for listening and for investing in yourself,
which is the most important investment you can make.