News: First Republic sold

Monday, May 1, 2023

First Republic sold

May 01, 2023

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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. Let’s start with news: There is no news.

After taking bids over the weekend, Asian markets opened without the FDIC making an announcement on the fate of the troubled lender.

First Republic has been on rocky footing for more than a month after depositors fled following the failures of Silicon Valley Bank and Signature Bank (more on that down below). A $30 billion rescue orchestrated by big banks failed to staunch the bleeding, which worsened following a disastrous earnings call last week. With First Republic flailing like a wooly mammoth in La Brea, banking regulators and top financial institutions scrambled to pull together bids in an attempt to minimize the damage to the banking sector (and the FDIC’s deposit insurance fund).

As First Republic limped into the weekend — Reuters reported receivership was imminent on Friday, though a source with direct knowledge told MM that evening that the bank’s board had not been notified — JPMorgan and PNC Financial soon emerged as early contenders to take over the bank, Ben White and Victoria Guida reported on Saturday.

But, at least as of Sunday night, there was no takeover. If the bank ultimately goes into receivership this week without a buyer, FDIC Chair Martin Gruenberg will face tough questions from lawmakers on both sides of the aisle about whether he had truly exhausted private sector alternatives before taking over a third bank in less than two months.

While First Republic — like SVB and Signature — had an unusual business model that relied on wealthy clients and uninsured deposits, other banks are likely to face similar pressures.

“This will continue. The market will continue looking for outliers,” author and investment banker Chris Whalen told MM.“It could be any number of regionals that don’t have sound funding or good relationships with their depositors.”

If regulators “don’t come up with an actual plan, we’re going to get another one of these.”

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 ssutton@politico.com and Zach at zwarmbrodt@politico.com.

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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.”

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