NEW YORK, May 1 (Reuters Breakingviews) - Jamie Dimon is back at the bailout rodeo. After buying Bear Stearns 15 years ago left a bad taste in his mouth, JPMorgan’s (JPM.N) CEO said he’d never ride to the rescue again. In the wee hours of Monday morning, however, he agreed to take mid-sized First Republic Bank (FRC.N) out of receivership from the Federal Deposit Insurance Corp. It relieves pressure on taxpayers for now and should benefit his mega-bank’s shareholders, but suggests U.S. authorities don’t have a handle on how to rescue collapsing lenders without further entrenching a risky too-big-to-fail mentality.
It’s a sweetheart deal for JPMorgan. The bank acquires nearly $229 billion of assets and absorbs some $173 billion in loans at a roughly 13% discount to book values. After taxes and paying the FDIC $10.6 billion, JPMorgan should get a $2.6 billion boost before integration costs. And JPMorgan doesn’t expect its capital cushion to suffer.
To secure Dimon’s support, the FDIC threw in some goodies. The agency will share losses of up to 80% on the large majority of First Republic’s loan book. There’s also a $50 billion loan from the FDIC at specific terms that have not been disclosed so far.
Under normal circumstances, JPMorgan would not have been allowed to buy First Republic at all, let alone with backstops. Banks that already hold at least 10% of U.S. deposits are not allowed to obtain more by acquisition. JPMorgan already exceeded the threshold with $2 trillion at the end of last year. The deal enhances JPMorgan’s, and Dimon’s, clout. Jane Fraser at Citigroup (C.N), Brian Moynihan at Bank of America (BAC.N) and Bill Demchak at PNC Financial Services (PNC.N) can only watch as their biggest rival gets bigger. The 4% rise in JPMorgan’s shares on Monday also indicates Dimon’s ability to use the government’s largesse to his advantage.
The handling of First Republic begs questions about the next bank to fall. By asking 11 lenders, including JPMorgan, to inject $30 billion of deposits into First Republic in late March, the FDIC made it nearly impossible to compromise those positions later. It left the agency in a precarious negotiating position and speaks to the idea that it is still struggling with how to safeguard U.S. savers without introducing additional moral hazard.
The situation also gives Dimon a leg up. He has saved First Republic’s depositors and, in some ways, the FDIC. There can be no assurance that taxpayers will be better off once he rides into the sunset. The challenge is to ensure it’s his last rodeo.
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CONTEXT NEWS
JPMorgan said on May 1 it had bought most of First Republic Bank’s assets and assumed its deposits and other liabilities from the Federal Deposit Insurance Corp after the agency said it had seized the lender on the same day.
As part of the deal, the FDIC will provide a five-year, $50 billion fixed-rate term loan. The regulator also will provide 80% loss coverage on single-family residential mortgages and commercial loans, including commercial real estate, which make up nearly 80% of First Republic’s loan portfolio.
