By Pam Martens and Russ Martens: April 19, 2023

When JPMorgan Chase, Bank of America, Citigroup and Wells Fargo announced on March 16 that they were plunking $5 billion each of their corporate funds as uninsured deposits into the sinking First Republic Bank, they tied their corporate brand and their own bank’s image of safety and soundness to that of a teetering lender.

Here’s what happened in short order thereafter:

First Republic Bank’s stock closed on Thursday, March 16, the date of the announcement of the big infusion of money during market hours, at $34.27. On Friday, March 17, First Republic’s stock closed at $23.03. On Monday, March 20, the stock closed at $12.18. What the mega banks had hoped would be a vote of confidence in First Republic Bank was viewed by the composite wisdom of the markets as an act of desperation and the market savaged the stock price of First Republic by 64 percent in two trading sessions. (Currently, First Republic’s stock remains down 89.6 percent year-to-date.)

On Sunday, March 19, S&P Global downgraded the credit rating of First Republic Bank deeper into junk territory and kept the bank on negative credit watch.

Also on Sunday, March 19, the Wall Street Journal reported that First Republic Bank customers “have pulled some $70 billion in deposits.” According to the bank’s annual report for the period ending December 31, 2022, it held deposits at year end of $176.4 billion. If, indeed, it had lost $70 billion in deposits, that would mean that it was down to potentially something in the neighborhood of $106.4 billion in deposits versus a total loan portfolio of $166.9 billion, according to its annual report for the period ending December 31, 2022.

Equally troubling, First Republic’s annual report provides this nugget:

“Our single family mortgage loans, including HELOCs, were $101.5 billion and represented 61% of total loans at December 31, 2022, compared to $79.4 billion, or 59% of total loans at December 31, 2021.”

Adding to First Republic’s toxic mortgage brew, according to reporting at Bloomberg News, First Republic Bank was making interest-only jumbo mortgage loans in the super-wealthy and tony enclaves of  Beverly Hills, Malibu, Greenwich, Connecticut, the Hamptons in Long Island, New York and similar locales.

This makes the so-called “rescue” of First Republic Bank by the mega banks on Wall Street feel like it was less motivated by a concern for the financial system and more out of a concern for the property values of the richest communities in the U.S. (Not to mention that most of these same banks were underwriting billions of dollars in secondary common stock offerings for First Republic as well as preferred stock, both of which have lost the bulk of their market value.)

First Republic’s annual report for the period ending December 31, 2022 provides additional insights on its mortgage loan situation as follows:

“Our single family mortgage loans represent over half of our total loan portfolio. Single family mortgage loans primarily consist of hybrid ARMs that will adjust within one to ten years in the future, as well as loans that are currently adjustable rate. Increases in prevailing market interest rates result in increased payments for borrowers who have ARMs, which may increase the possibility of defaults. In addition, a substantial portion of single family mortgage loans have an initial interest-only period of generally ten years. When an interest-only loan converts to fully-amortizing status, monthly payments are subject to change and may increase by a substantial amount. Even without an increase in prevailing market interest rates, borrowers may not be able to afford the increased monthly payments, which may result in higher loan delinquency levels. In addition, real estate values may decline and credit standards may tighten in concert with the higher payment requirements, which may make it difficult for borrowers to sell their homes or refinance their loans to pay off their mortgage obligations. As a result, interest-only loans are considered to have an increased risk of delinquency, default and foreclosure compared to conforming loans and may result in higher levels of realized losses. Furthermore, a substantial portion of our single family loans consists of jumbo loans. The secondary market for jumbo mortgages has historically been less liquid compared to conforming loans, which could impact the amount of loans that we sell in the secondary market. All of these factors related to our single family mortgages could, consequently, adversely affect our business, results of operations or financial condition.”

There is one more fascinating aspect to the First Republic saga. JPMorgan Chase, Bank of America, Citigroup and Wells Fargo – the four banks that cumulatively sluiced $20 billion into First Republic’s sagging coffers – all trade publicly. They also own the four largest federally-insured banks in the U.S. That federal deposit insurance is backstopped by the taxpayers of America and is effectively a subsidy to these institutions. Under both SEC regulations and by virtue of that subsidy, these banks need to be accountable.

Under SEC rules, when a publicly-traded company enters into “certain material agreements not made in the ordinary course of business,” it must be disclosed within four business days in an 8-K filing with the SEC. The funny thing is, not one of the four banks filed an 8-K disclosing the nature of the agreement it had made with First Republic or the specifics of any guarantees for the return of these deposits by a federal regulator. (If these 8-Ks were filed, they are being withheld by the SEC because they are not in the public section of the SEC’s website.)

The banks allowed hedge fund titan Bill Ackman, who has 697,000 followers on Twitter, to Tweet the inference that these mega banks had been assured that their “deposits would be backstopped if it failed” without clarifying to the public what the real story was.

The only official word as to what had been agreed to came from First Republic in a press release where it stated that the agreement boiled down to those four banks, along with seven others, placing uninsured deposits into First Republic Bank for “an initial term of 120 days at market rates.”

We emailed the press contacts at JPMorgan Chase and Citigroup and asked why the bank didn’t file an 8-K with the SEC explaining the terms of this material agreement. JPMorgan Chase was silent. Citigroup responded: “You can list us as a decline to comment.”

We also asked the press contact at the SEC why this unprecedented action would not constitute a material agreement requiring the filing of an 8-K by these publicly-traded banks. We first received no answer from the SEC. We wrote again removing the names of the banks and making it a hypothetical situation where a publicly-traded company makes an infusion of $5 billion into another publicly-traded company – shouldn’t an 8-K be filed to inform shareholders of this material agreement and what form of guarantee the company had received to get this money returned?

The SEC finally responded: “We would decline comment on a specific issuer, filing or hypothetical situation.”

Another threat to shareholders is reckless co-branding. To summarize what happened above is that without any vote from shareholders, JPMorgan Chase, Bank of America, Citigroup and Wells Fargo decided to align their brands with that of First Republic Bank – a very bad idea indeed. There is a pattern developing here in reckless co-branding:

Bankrupt FTX, the customer-looting crypto exchange tried to hide its warts by co-branding with the likes of Tom Brady and the Miami Heat. For years now, shareholders of JPMorgan Chase have allowed the Board of Directors to indelibly tie the scandal-ridden brand of Jamie Dimon, its Chairman and CEO, to the JPMorgan Chase brand. The Board even paid Dimon $50 million in stock options after the bank’s fourth and fifth felony count to stay on for another five years. Yesterday, we reported on the decision by Apple to further hitch its wagon to the likes of Goldman Sachs – a perennial target of protest by young folks who call it “Government Sachs,” for good reason.

Add all of this to the fact that the Swiss government recently stripped shareholders of both UBS and Credit Suisse of the right to vote on the shotgun marriage of the two and there is a very real feeling that kleptocracy is rapidly replacing free markets.

First Republic Bank is scheduled to report its earnings and update on its situation after the market closes on Monday, April 24. Expect a lot of hangovers and sweaty palms at the mega banks during the trading day on Monday.