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Big Banks Agree to Historic $30B Deposit Injection in First Republic
- Reason077 4y agoSo will every struggling bank get a bailout from now on? How long is this sustainable?
- tekla 4y agoHow is this a bailout?
- FollowingTheDao 4y agoA bailout is the provision of financial help to a corporation or country which otherwise would be on the brink of bankruptcy.
- ceejayoz 4y agoI know that's the Wikipedia top-line definition, but further in https://en.wikipedia.org/wiki/Bailout https://en.wikipedia.org/wiki/Bailout: > However, the common use of the phrase occurs where government resources are used to support a failing company typically to prevent a greater problem or financial contagion to other parts of the economy. This is not what's happening in this case.
- colinmorelli 4y agoThis is a very technical definition that effectively makes the word meaningless. Under this definition, most early VC equity rounds are bailouts, initial stock purchases in new companies are bailouts, etc. It is, technically, true. But it’s not very helpful in understanding why these things happen and which are good vs bad.
- FollowingTheDao 4y ago> not very helpful Not very helpful to who? It is very helpful to the average Joe in explaining why they are getting screwed over.
- govg 4y agoIn that case it isn't helpful to the average Joe, since the word's usage for them isn't the same as that of the technical definition. When someone says bailout in media, they mean a government funded action to get someone out of bankruptcy, not a private action to provide liquidity.
- colinmorelli 4y agoNo average joe is getting screwed over by private companies investing money in other private companies, any more today than they were on any previous day where the same things happen. This is not news, and is only relevant because of the crisis. No public dollars are funding this.
- sharemywin 4y agoit should be a loan(with highest interest rate their charged they customers) and then some kind of insurance/loan.
- pjc50 4y agoIt is a loan! Well, a deposit.
- FollowingTheDao 4y agoAnd a high priced loan! And how will that loan eventually get paid back? Wait and see!
- ceejayoz 4y ago> And a high priced loan! The statement describes it as a deposit, not a loan. Where are you getting this information?
- ceejayoz 4y agoIt's pretty sustainable as long as it's banks having liquidity crises instead of solvency ones.
- pjc50 4y agoThis is not a bailout. This is just what it says: deposits. An anti-bank-run by the other banks.
- samstave 4y ago>>An anti-bank-run by the other banks This is actually pretty terrifying when you think about it... Its indicative of just how much a shell game fractional reserve banking truly is.
- Eumenes 4y agoAs long as the money printer goes BRRRRRRRR
- tacker2000 4y agoIts clear they are trying to prevent a bigger meltdown here. But this is probably not the end of it…
- nkozyra 4y agoIf there's an extended meltdown I think it has larger ramifications, since this isn't about solvency but instead about people fundamentally not understanding and/or trusting how banks do business.
- FollowingTheDao 4y ago> this isn't about solvency but instead about people fundamentally not understanding and/or trusting how banks do business. No, solvency is exactly what this is about: https://www.cnn.com/2023/03/15/investing/first-republic-downgrade/index.html https://www.cnn.com/2023/03/15/investing/first-republic-down... "First Republic Bank’s credit rating was downgraded on Wednesday by both Fitch Ratings and S&P Global Ratings on concerns that depositors could pull their cash despite the federal intervention. " Solvency means you are able to pay your debts. Banks cannot pay their debts, ever. Banks are never solvent, they are always in debt. They make it appear they are solvent, on paper. They are only solvent in the future, not in the present. This is they myth of banking that people do not understand or appreciate and that always puts the economy at risk. It was the FED raising rates that pushed their solvency further out into the future.
- ceejayoz 4y ago> They are only solvent in the future, not in the present. That's what solvency means. You're mixing up solvency (long-term) and liquidity (short-term).
- FollowingTheDao 4y agoThe GP did not use the term liquid, they used the term solvent.
- zerop 4y agoWhat's the problem when you can always print money out of thin air. The global currency can't be Fiat. No. To the down voters - sarcasm!(I need to mention this explicitly:(..
- Spooky23 4y agoWhy should First Republic get destroyed by a panic because they are headquartered in San Francisco? By all accounts they are a well run bank.
- FollowingTheDao 4y agoI hear this often, that this only happened because of "panic". But people panicked for a reason, and a good one. You know, the way the economy works is that the last one out is the sucker. Well run banks are not downgraded by Fitch and the S&P (Wednesday) citing risks to its funding and liquidity.
- Spooky23 4y agoBanking benefits society when it’s stable. We should be ensuring that regulation is in place to prevent irresponsible risks such as the behavior of SVB so that banks like First Republic, which if anything is super conservative, aren’t driven out of business for no reason. A world where banking consists of Chase, BoA, etc is not a good one.
- Reason077 4y agoThe problem when you print too much money out of thin air? Inflation.
- jeremyjh 4y agoIf brute force isn’t working, then you are not using enough.
- pjc50 4y agoNo money printing involved here: this is just a whip-round to support a struggling colleague, admittedly with very large numbers involved. It's entirely private action, no government involved!
- simonebrunozzi 4y agoI'm not a finance guy, but should this equate to a big rebound in the stock price? It was trading at ~$130 a month ago, then significantly down in the last few days, and now it seems to be at ~$30 in pre-market.
- hikingsimulator 4y agoIt may rebound the price, but it doesn't mean it will big. The money will likely be used for helping out with cash flow and surviving the next months, until the bank is out of the red zone. A stock price is representative of the value of expected future earnings. $30 may just already price in those. Since the stock didn't go to zero, it means agents on the market still expect the company to survive and operate at a profit in the future.
- FollowingTheDao 4y agoDoes not look like it, still doing badly after hours: https://www.cnbc.com/quotes/FRC?qsearchterm= https://www.cnbc.com/quotes/FRC?qsearchterm= I would stay out of bank stocks for a while. https://www.cnbc.com/2023/03/17/credit-suisse-sheds-another-5percent-as-traders-digest-emergency-liquidity.html https://www.cnbc.com/2023/03/17/credit-suisse-sheds-another-... Just wait for the middle of the next Great Depression and invest your money then.
- extheat 4y agoIf you’re waiting for a dip at lows, it probably won’t come. Back in November when the stock market bottomed people constantly spread fear that we’d see even lower lows by this time of year. Except we haven’t, and even despite the bank worries the S&P 500 is still holding onto the 4000 line.
- eis 4y agoThe news hit yesterday and got them +10% before close but it seems pre-market they are down currently -23%. Doesn't look like there is much reason to rebound to anywhere their previous levels in the short term.
- jay-barronville 4y ago
- argella 4y agoBig depositors are moving their money out of small banks and into big banks because they see that big banks will get bailouts if they get into trouble whereas small banks will only get the 250k insurance. Nice bit of consolidation. will make it easier for the gov to roll out central bank digital currency and obtain even more control over our lives.
- DeathArrow 4y agoMake one bank to rule them all. Call it The Bank.
- esotericimpl 4y agoThats clearly what the people want... You get the government you deserve. etc... Based on last weekend's fun the VCs just want their money insured. The only way to do that is to have the government / FED as the final backstop.
- a1445c8b 4y agoI have a better idea. Let’s call it The Federal Reserve.
- frankfrankfrank 4y agoAnd then we can create an authoritarian uniparty to govern us all from behind a false appearance of a choice between two fake parties. One of the facade parties we can make appeal to one half of society and the other we can make appeal to the other half of the society to make commoners think they are both choosing, having a say, and can feel virtuous about their fake choice opposed to the folks who chose the other faker party. There can even be meaningless elections where the people can choose between the things the uniparty was going to do anyways like killing people. Eventually we can just call it The Party and we can be at war with Eurasia, as we always have been.
- DeathArrow 4y ago
- raphaelj 4y agoWhy are these putting an uninsured deposit instead of buying equity?
- pjc50 4y agoNo price risk. It's both a prop up of the bank and a one-way bet on its continuing existence.
- raphaelj 4y agoIf First Republic goes bankrupt, it's still the same, isn't it?
- pjc50 4y agoBut if First Republic does not go bankrupt, this approach returns exactly their initial deposit, no more, no less. Whereas it's plenty possible for it to continue to exist but at a reduced equity value. (Edited out "yes", because sibling comment is correct: if they made an equity investment, it could go to zero very much more easily than a deposit)
- eloff 4y agoPlus interest mind you, but it’s negligible.
- stephen_g 4y agoNo - depositors get priority over creditors and creditors get priority over shareholders. So if it fails, depositors might get 75% or so back, and shareholders zero.
- mwnivek 4y agoOne factor may be the regulatory caps on the market share of the biggest banks: https://ilsr.org/rule/market-share-caps/ https://ilsr.org/rule/market-share-caps/
- pjc50 4y agoSince half the comments haven't read the article and are making knee-jerk responses: "Bank of America, Citigroup, JPMorgan Chase and Wells Fargo announced today they are each making a $5 billion uninsured deposit into First Republic Bank. Goldman Sachs and Morgan Stanley are each making an uninsured deposit of $2.5 billion, and BNY-Mellon, PNC Bank, State Street, Truist and U.S. Bank are each making an uninsured deposit of $1 billion, for a total deposit from the eleven banks of $30 billion. This action by America’s largest banks reflects their confidence in First Republic and in banks of all sizes, and it demonstrates their overall commitment to helping banks serve their customers and communities. Regional, midsize and small banks are critical to the health and functioning of our financial system." Big highlighter on "deposit". No government or even FDIC money is involved in this. It's significant that this is a private action. It's basically the exact opposite of the VCs telling each other to get their money out of SVB; it's a bunch of banks putting their own money into FRB. A "hold the line" move. "We, JPMorgan, are willing to bet $5bn that First Direct does not fail, with no upside to us if they do not" is a rather powerful statement.
- scotty79 4y agoI wonder what if First Republic collapses anyways? Will they be made whole anyways even though deposits are uninsured because they are deposits?
- javajosh 4y agoIn the event of a collapse of course the depositors will be made whole, especially after they've showed such courage.
- dymk 4y agoYellen says otherwise
- FollowingTheDao 4y agoAnd there is the government bail out...
- 4y ago
- NetBeck 4y agoThis is reminiscent of the Panic of 1907: >Morgan and his associates examined the books of the Knickerbocker Trust and decided it was insolvent, so they did not intervene to stop the run. Its failure, however, triggered runs on even healthy trusts, prompting Morgan to take charge of the rescue operation.[0] [0] https://en.wikipedia.org/wiki/Panic_of_1907#J._P._Morgan https://en.wikipedia.org/wiki/Panic_of_1907#J._P._Morgan
- shapefrog 4y agoYou misunderstand - He did nothing so he could take charge of the rescue operation ... Why pay $1 for something you can have for pennies?
- red_hare 4y agoMy favorite part of that story is that Morgan was a rare book collector, his office was essentially a vault, and he locked the other bankers in with him. > As discussion ensued, the bankers realized that Morgan had locked them in the library and pocketed the key to force a solution, the sort of strong-arm tactic he had been known to use in the past. Morgan then entered the talks and advised the trust companies that they must provide a loan of $25 million to save the weaker institutions. The trust presidents were still reluctant to act, but Morgan informed them that if they did not it would lead to a complete collapse of the banking system. Through his considerable influence, at about 4:45 a.m. he persuaded the unofficial leader of the trust companies to sign the agreement, and the remainder of the bankers followed. Having received these commitments, Morgan allowed the bankers to go home. You can tour the exact room where it all happened at the Morgan Library Museum in New York.
- gist 4y ago> the bankers realized that Morgan had locked them in the library and pocketed the key to force a solution, the sort of strong-arm tactic he had been known to use in the past. While that story is often repeated it sounds for sure apocryphal. A bunch of men from that day and age couldn't have figured out how to get out of that room? Or simply revolted and freaked out? Now maybe he feigned doing that or maybe he actually did 'lock the door' but so what? The story and legend value is just to much to ignore. It's almost certainly greatly exaggerated or not even close to being true. People can't even agree on news that happened in this day and age let alone the golden era of back in the day newspaper exaggeration. In any case the 'lock' might have been some other leverage he used over the players that wouldn't make sense to the general public or make a good news story.
- dsakljvalkjlkj 4y agoProbably even done with no reciprocity. The big banks are eager to show their strength during a meltdown to get in good with the regulators and the public. This is one of those times the bankers should feel warm and fuzzy inside. And... cash deposited at another bank still counts as risk-free cash for your capital requirements even if it's uninsured (hah!).
- eloff 4y agoPlus it’s “free” money. People have been fleeing from regional banks to the big banks, so they have all this sudden influx of deposits coming in. The interest they get from FRC is basically paid right back out to their new depositors and is a wash.
- srj 4y agoThis reminds me of the stories from the GFC where the treasury and fed brought together large banks and asked them to sign on to TARP.
- deleted 4y ago[deleted]
- nntwozz 4y agoThe dividend was suspended that's why it's fallen overnight and premarket.
- eloff 4y agoThat was pretty obviously going to happen, so I’m doubting that’s the catalyst.
- SilverBirch 4y agoThis is quite funny right, people get scared of FR so they pull their money at and run to daddy (JPM) who then proceeds to take that money and... put $5Bn uninsured into FR. What I really don't understand though, is that not only is this a level of co-ordination any normal industry would be barred from doing, haven't we essentially moved to a point where any reasonably large bank is now being gauranteed because we're so scared of contagion? Doesn't this basically make Banking a utility? There's massively limited downside to running a bank now. Given that there's now a capped downside to banking, wouldn't it be logical at this point to cap upside? 100% taxation over some level of profits - since the obvious answer to a capped downside is to up your risk to increase profit?
- ceejayoz 4y ago> This is quite funny right, people get scared of FR so they pull their money at and run to daddy (JPM) who then proceeds to take that money and... put $5Bn uninsured into FR. A $5B loss won't collapse JPM, so this works OK. (And it wouldn't be anywhere near $5B, either; they'd get a significant portion back even in the event of a FRB collapse.) > is that not only is this a level of co-ordination any normal industry would be barred from doing This seems the opposite of anti-competitive behavior that gets cartels/conspiracies in trouble.
- pjc50 4y agoArguably basic transactional banking with payment rails should be a utility, but the US shut its postal banking system and people are paranoid about CBDCs. As for the coordination, it's the mirror image of people telling each other to get their money out of SVB.
- rswail 4y agoWhen the Fed finally gets FedNow fully up (July this year), basic transactional banking with rails will be a utility. The equivalent of Mark Cuban is doing about basic pharmaceuticals in California will be able to be done for banking services. Payroll services will be able to be instant, as well as bill paying.
- 4y ago
- rswail 4y agoThis was not the month to start watching "Mr Robot" for the first time.
- 700000thMistake 4y ago[dead]
- jacooper 4y agoIs this the first time banks moved independently to stabilize the financial system?
- ncjeixiehsb 4y agoHappened in the last crisis too when then treasury Secretary Paulson brokered some deals and JPM stepped up more than once to buy toxic assets nobody knew how to value. Probably this deal was done with Yellen coordinating things although that’s not mentioned. Guesses are that when nobody wanted to step up and buy SVB at par they had to do something here or face the wrath of this administration and half senate.
- bthrn 4y ago“I’m so confident that X is solvent that I’m giving X a bunch of money, for solvency” seems a bit odd to me. If everything is fine, why would any of this be necessary?
- ceejayoz 4y agoBecause it's not for solvency, but for liquidity.
- bthrn 4y agoThe point stands - if everything is fine, as many banks seem to be saying, their intervention would not be necessary.
- Swenrekcah 4y agoPeople in a panic can destroy perfectly good things because they're afraid. This move is an attempt to reduce uncertainty and panic.
- pksebben 4y ago"perfectly good" in this case reads a little like "fragile". We over optimize when things are good and then wonder what happened when there's a pothole. of course people are fickle and of course rates are going to change. Not being prepared for this is irresponsible.
- Swenrekcah 4y ago> perfectly good" in this case reads a little like "fragile". All banks are vulnerable to a bank run, no matter how well they’re managed. I agree with you though, SVB (and some others) failed in their risk management. Partly due to relaxed regulations I suspect. However that doesn’t mean all the banks made the same mistakes. It’s easy to see why people are worried but a panic will only make things worse.
- 4y ago
- cyclecount 4y agoReally feels special to be living through such a historical time. But as a millennial, I've lived through numerous record-braking financial events, from the insane QE after the 2008 bailouts, to the numerous industries that get taxpayer cash over and over after cutting staff and spending profits on stock buybacks, to the CAREs Act which was maybe the greatest wealth transfer upward of my lifetime (yet). We never stop striving to break records.
- CatWChainsaw 4y agoOur generation gets to live through the best and worst times of human history!
- JOnAgain 4y agoThe rational way I am looking at this. When rescuing SVB, the FDIC said they would make depositors whole by imposing some sort of tax on other FDIC members. > Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law. This kind of tax would probably be applied in proportion to deposits held. With the knowledge that they'd be on the hook to cover depositors, it makes sense for large banks to band together to stave that off. Also, they have to cover this anyway -- either by losses on deposits if it ever came to that or via "special assessment". The leaders probably see it as preferable and less risky to shore up First Republic now vs. later.
- pjdkoch 4y agoHow is nobody mentioning crypto yet?
- fairity 4y agoIf these big banks are so confident in First Republic not failing, why not just purchase First Republic stock (or acquire it outright for its current market cap of $5b)? My hypothesis is that they don't actually believe in First Republic. They just want the contagion to not spread. And, sending uninsured deposits is actually the least risky way to do that since deposits are at the very top of the liquidation stack.
- broknbottle 4y agoThis is them protecting themselves from being affected by a domino effect and them having to crawl back to the government asking for another bailout that will come with more regulation and scrutiny. They know it'll be an uphill battle and they'll have to spend the next 10-15 years trying to convince everyone that deregulation is GuD 4 BiZnEsS and slowly chipping away at regulation
- GeekyBear 4y agoWe have seen this before, when bad derivatives trades threatened Long-Term Capital Management, a few years before Glass Steagall was repealed and banks with FDIC deposits were also allowed to take part in these sorts of risky financial activities. >NARRATOR: After four days, the Fed acted, but not directly. The Wall Street banks were pressured to bail out LTCM themselves. MICHAEL GREENBERGER: The government said, "It is our belief that your financial stability is in jeopardy. And the way to solve this problem is for you each to pony up $400 million and buy the fund, prevent it from collapsing, and try and work the thing out." ROGER LOWENSTEIN: Fourteen banks agree to put a few hundred million each, about $3.5 billion total. http://www.shoppbs.pbs.org/wgbh/pages/frontline//warning/etc/script.html http://www.shoppbs.pbs.org/wgbh/pages/frontline//warning/etc... https://en.wikipedia.org/wiki/Long-Term_Capital_Management https://en.wikipedia.org/wiki/Long-Term_Capital_Management
- anotherhue 4y agoAnd what percentage of these funds were just withdrawn from FR by skittish depositors?