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**MAY 3, 2023**
Kuttner on TAP
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**** Morgan's Takeover of First Republic: A
Shady Sweetheart Deal
The comptroller of the currency rejected other alternatives in the rush
to have government underwrite Morgan's latest coup.
The government's reliance on JPMorgan Chase as the white knight to
take over failed First Republic Bank reveals the rot at the core of both
the banking system and the bank regulatory system. For decades,
regulators have allowed one bank merger after another, allowing the
biggest banks to get bigger, while failing to supervise the kind of
risks that ultimately caused First Republic to crash.
JPMorgan Chase, the nation's largest bank, with $2.47 trillion
<[link removed]>,
or over 10 percent of all U.S. deposits, will now be even bigger. Morgan
acquires about $212.6 billion of First Republic's loans and $92.4
billion in deposits. JPMorgan CEO Jamie Dimon has said the bank would
book a one-time profit of $2.6 billion.
Under the acquisition deal approved May 1
<[link removed]>
by the Office of the Comptroller of the Currency (OCC), JPMorgan's
primary regulator, the bank will not have to assume any of First
Republic's debt; it will get $50 billion in financing from the FDIC,
which will also guarantee 80 percent of any losses that Morgan incurs in
taking over First Republic's portfolio of mortgage loans.
In approving the takeover, acting Comptroller Michael Hsu wrongly
certified that the deal would not add to the risks in the stability of
the banking system, and he waived concerns that it would increase bank
concentration. OCC had the sole authority to certify that the
acquisition was in the public interest, and that a 1994 law limiting any
one bank to under 10 percent of all U.S. deposits could be waived. In
other words, Hsu could have stopped the merger, and forced the FDIC to
consider smaller suitors. He did not.
Hsu is one of the officials in charge of rewriting bank merger
guidelines. He has now shown his hand as being just fine with more
concentration.
The deal raises several questions, which I will address in more detail
in my next post. Where were the other regulators? I'm told that at
least one raised serious objections. The deal Hsu blessed with JPMorgan
committed FDIC funds. Did the FDIC go along willingly? And three other
banks had expressed interest in acquiring First Republic. Why was that
alternative not taken seriously?
This pattern of looking for white knights among other behemoth banks
became part of the government's playbook during the 2008 financial
collapse. During that crisis, JPMorgan bought failing investment bank
Bear Stearns for $1.4 billion with funds from the Federal Reserve, as
well as much of failed lender Washington Mutual for $1.9 billion.
The pattern continued in the Obama administration's response to the
collapse, which bailed out the biggest banks with no losses to
shareholders or changes to management, leaving the biggest banks bigger
and more concentrated than ever.
Call me a socialist, but if the government is going to put out all this
money to enable JPMorgan to take over a failed bank, the government
might as well just own the bank directly.
"The failure of First Republic Bank shows how deregulation has made the
too big to fail problem even worse," Sen. Elizabeth Warren (D-MA) said
in a tweet <[link removed]>.
"A poorly supervised bank was snapped up by an even bigger
bank-ultimately taxpayers will be on the hook. Congress needs to make
major reforms to fix a broken banking system."
Amen to that.
~ ROBERT KUTTNER
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Fake Plaintiff, Fake Harm, Fake Case
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The Supreme Court is poised to unwind a fair number of legal principles
to make sure student debtors don't get a break. BY DAVID DAYEN
New York Considers Community Land Trusts
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Nonprofit developers are working to get first dibs on transforming
multifamily housing developments into real options for rent-burdened New
Yorkers. BY LUCA GOLDMANSOUR
Introducing X-Date: A Debt Ceiling Newsletter
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Democrats could have tried to abolish this pointless and dangerous
economic time bomb, but failed to do it. BY RYAN COOPER
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