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First Republic awaits bidders as FDIC deadline inches closer

Brandon Foster on July 6, 2023

First Republic — According to sources close to the situation, federal regulators are holding an auction for regional bank First Republic.

According to the source, the final bids for First Republic Bank are due at 4 pm on Sunday.

The auction

The auction will be handled by the Federal Deposit Insurance Corporation, the independent government agency that insures bank customers’ deposits.

A decision regarding a buyer for First Republic is likely going to be announced on Sunday evening.

As the market continues to endure stress, government officials typically try to announce solutions before global markets initiate trading.

Some Asian markets are usually scheduled to start trading at 8 pm on Sundays.

The bank’s shares

First Republic shares took a sharp decline, going from $122.50 on March 1 to around $3 a share last Friday.

There were expectations that the FDIC would get involved by the end of the day and take control over the San Francisco-based bank, along with its deposits and assets.

However, the move never materialized.

The FDIC already did something similar with two other banks in March, Silicon Valley Bank and Signature Bank.

The takeover occurred when runs on the two banks by their customers left lenders unable to make up for customer demands for withdrawals.

Potential buyers

In another report, The Wall Street Journal pegged JPMorgan Chase and PNC Financial among the prominent banks bidding on First Republic.

The reported bids are part of a potential deal that would follow an FDIC takeover of the regional bank.

“We are engaged in discussions with multiple parties about our strategic options while continuing to serve our clients,” said First Republic on Friday night.

If a buyer should come by for the regional bank, the FDIC would be stuck with money-losing assets.

The same thing had happened after it found buyers for viable portions of SVB and Signature after the FDIC took control of the banks.

Similar instances

During the financial crisis in 2008, which sparked the Great Recession, several shotgun marriages occurred under the arrangement of regulators.

They didn’t want significant banks to fall into the hands of the FDIC before it was sold.

For example, JPMorgan bought Bear Stearns for a fraction of its initial value in March 2008.

In September that year, it bought savings and loan firm Washington Mutual.

Bank of America later bought Merrill Lynch.

The downfall of Washington Mutual in 2008 was the largest bank failure in the history of the United States.

First Republic, a regional bank more prominent than Silicon Valley Bank or Signature Bank, is the second largest failure.

Not enough lifeline

Following the collapse of SVB and Signature in March, First Republic received a lifeline of $30 billion.

It came in the form of deposits from several of the largest banks in the United States.

They all came together after the intervention of Treasury Secretary Janet Yellen.

The banks that provided the lifeline include:

JPMorgan Chase
Bank of America
Wells Fargo
Citigroup
Truist

The banks agreed to take the risk and collaborate to keep cash flowing in First Republic, hoping it would provide confidence in the country’s failing banking system.

The banks and federal government wanted to reduce chances of other banks suddenly starting a mass withdrawal of their cash.

Although the cash helped First Republic get through the last six weeks, the regional bank’s quarterly financial reports were less than enthusiastic.

The disclosure of massive withdrawals by the end of March led to new concerns regarding its long-term viability.

Shaky depositors

First Republic’s financial reports showed depositors withdraw over 41% of their money from the bank over the first quarter.

Most withdrawals were from accounts that had more than $250,000, suggesting the excess funds weren’t insured by the FDIC.

Uninsured deposits at the bank dropped by $100 billion throughout the first quarter, a period that saw total net deposits dropping by $102 billion, excluding the infusion of deposits from other banks.

The uninsured deposits were at 68% of its total deposits around December 31, but only 27% of its non-bank deposits by March 31.

In First Republic’s earnings statement, the bank said insured deposits dropped moderately over the quarter and remained stable from the end of March until April 21.

Banks don’t have all the cash on hand to cover all deposits.

Instead, they take in deposits and use the cash to make loans or investments like buying US Treasuries.

When customers lose confidence in a bank and rush to withdraw their money, typically known as a “run on the bank,” it could cause a profitable bank to collapse.

First Republic’s recent earnings report indicates it was still profitable in the first quarter, with net income at $269 million, down by 33% from 2022.

However, the news of the loss of deposits concerned investors and regulators.

While others who had more than $250,000 in their First Republic accounts were likely wealthy individuals, most were probably businesses that needed the cash to cover daily operating costs.

Companies with 100 employees can easily need more than $250,000 to cover a biweekly payroll.

First Republic’s annual report said that 63% of its total deposits were from business clients with the rest from consumers.

Silicon Valley Bank had red flags, but no one noticed

Jerry Cooper on April 3, 2023

…

Silicon Valley Bank — Not many people were aware of the existence of Silicon Valley Bank beyond the tech industry two weeks ago.

However, the bank’s failure created a domino effect that put its name on everyone’s radar while shaking the foundation of the global financial system.

On March 10, state and federal regulators stepped in to salvage what was left of Silicon Valley Bank after clients withdrew $42 billion a day earlier.

The bank’s collapse embedded its name in history as the second-largest bank failure in the United States’ history following the Washington Mutual failure in 2008.

Digging through the rubble

Following the collapse, analysts and regulators started going through the rubble, finding several red flags.

The bank’s vulnerabilities weren’t as complicated as believed.

Going through what happened to Silicon Valley Bank, there were signs of basic corporate mismanagement that, when paired with customer panic, created an existential flaw.

Next week, the world will understand how people failed to see SVB’s red flags over the questions at Capital Hill and hearings at House and Senate hearings breaking down the bank’s downfall.

For now, there is no definitive answer – if there is, no one is willing to explain – but it’s clear that Silicon Valley Bank’s collapse is down to a series of missed warnings rather than a single person, system, or asset.

Red flags

Silicon Valley Bank was founded in 1983 as a financial institution and status symbol for lucrative Bay Area businesses and individuals.

The bank catered to venture capitalists whose wealth allowed them to take risks.

SVB was something of an elite club where members were known for their hunger for boldness, growth, and disruption.

Between 2018 and 2021, Silicon Valley Bank grew aggressively as assets nearly quadrupled.

By the end of 2022, the bank was the United States’ 16th largest bank, holding $209 billion in assets – a feat that shouldn’t have gone unnoticed.

Growth

Dennis M. Kelleher, the CEO of Better Markets, noted that when banks grow at an alarming rate, there are red flags everywhere.

His words suggest that the bank’s management capacity and compliance systems rarely grow at the same pace as the rest of the business.

According to reports from the Wall Street Journal and the New York Times, the Federal Reserve warned SVB about its insufficient risk-management systems in 2019.

It’s unclear if the Fed, the bank’s primary federal regulator, took action upon the warning.

The central bank is currently reviewing its SVB oversight.

During a news conference last Wednesday, Federal Reserve Chairman Jerome Powell offered some insight on what the central bank was doing.

“My only interest is that we identify what went wrong here,” he said.

“We will find that, and then make an assessment of what are the right policies to put in place so it doesn’t happen again.”

Uninsured deposits

According to Wedbush Securities, 97% of Silicon Valley Bank’s deposits were uninsured.

Kairong Xiao, a Columbia Business School professor, said that US banks typically finance 30% of their balance sheets with uninsured deposits.

However, SVB had a “crazy amount.”

Individuals or businesses with plenty of uninsured money in an institution can quickly remove their money if they suspect the bank is in trouble.

Silicon Valley Bank’s over-reliance on the deposits made it unstable.

When members of its social-media-engaged community of clients started worrying about SVB’s viability, it triggered mass panic.

Clientele

Silicon Valley Bank is renowned for its partnerships with young start-ups that other banks turn away.

When the start-ups gain traction, the bank grows with them.

SVB also managed the start-ups’ founders’ personal wealth as they were often light on cash with their fortunes tied to their companies’ equity.

“It was geographically concentrated,” said Kelleher. “It was industry-segment concentrated, and that industry segment was extremely sensitive to interest rates.”

“Those three red flags alone should have caused the bank’s officers and directors to take corrective action.”

Risk management

For casual observers, Silicon Valley Bank’s financial position in February wouldn’t have been anything noteworthy.

“The bank would’ve appeared healthy,” said Villanova University finance professor John Sedunov.

“If you look at their capital position, their liquidity ratios… they would’ve been fine.”

“Those traditional big-picture things, the front page items… They should have been fine.”

However, Sedunov noted that the problems were deeper under the bank’s portfolio and its liabilities.

SVB held 55% of its customers’ deposits in long-dated Treasuries, which are typically safe assets.

The bank wasn’t alone in loading up on bonds in a time where near-zero interest rates were prevalent.

Banks typically hedge their interest rate risk with financial instruments called swaps, trading a fixed interest rate for a floating rate for some time to minimize exposure to rising rates.

Silicon Valley Bank seemed to have zero hedges on its bond portfolio.

“Frankly, managing your interest rate risk exposure – that’s one of the first things that I teach an undergraduate banking class,” said Sedunov.

“It’s textbook stuff.”

The lost CRO

In 2022, the Fed boosted interest rates at an unprecedented pace, and for most of the year, Silicon Valley Bank operated with a big hole in its corporate leadership team: the chief risk officer.

Art Wilmarth of the George Washington University and an expert on financial regulation highlighted the CRO’s importance.

“Not having a chief risk officer is sort of like not having a chief operating officer or a chief auditing officer,” he said.

“Every bank of that size is required to have a risk management committee. And the CRO is the No. 1 person who reports to that committee.”

It was astonishing that SVB’s CRO was absent for most of 2022.

A CRO might have been able to recognize the outsize risk of the bonds’ dwindling value, which could have led to a course correction.

However, without one, there’s little excuse for SVB’s lack of hedges on its bond portfolio.

Experts said it’s likely people in the bank were aware of the risk and let them slide due to the bank’s capital and profitability.

“I’m sure someone saw, and I’m sure that somebody let it slide,” said Sedunov.

“Because again, if you’re in compliance with a lot of the big-picture things, perhaps they figured, well, they can survive something.”

“What’s the likelihood that you’re gonna have $40 billion in withdrawals all at one time?”

Silicon Valley Bank blame game commences

Jerry Cooper on March 16, 2023

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Silicon Valley Bank – The initial shock of the SVB collapse has faded away, and the blame game has begun as people look for the guilty.

The tech industry is blaming Silicon Valley Bank CEO Greg Becker.

Many blame Becker for allowing the company to become the second-largest US financial disaster in history.

According to an alleged SVB employee, Becker publicly disclosed the bank’s financial difficulties before discreetly putting up financial backing to weather the storm.

The actions created the environment for the fear that led to people withdrawing their funds.

“That was absolutely idiotic,” said the employee. “They were being very transparent.”

“It’s the exact opposite of what you’d normally see in a scandal. But their transparency and forthright-ness did them in.”

The buildup

Greg Becker and his leadership team said last Wednesday night that they anticipated to produce $2.25 billion in cash from $21 billion in asset sales, resulting in a $1.8 billion loss.

SVB has made no firm pledges despite its best efforts.

The news shook Silicon Valley, where the bank has been a major lender to technology innovators.

Numerous business owners were terrified.

According to California regulator papers, several corporations withdrew $42 billion on Thursday, while Silicon Valley Bank’s shares fell by 60%.

As Silicon Valley Bank closed that day, it had a negative cash position of around $958 million.

“People are just shocked at how stupid the CEO is,” said the SVB employee.

“You’re in business for 40 years and you are telling me you can’t raise $2 billion privately? Get on a jet and fly to Kuwait like everyone else and give them control of one-third of the bank.”

While Silicon Valley Bank has yet to comment, CEO Greg Becker is claimed to have apologized in a video statement to employees.

“It’s with an incredibly heavy heart that I’m here to deliver this message,” said Becker.

“I can’t imagine what was going through your head and wonder, you know, about your job, your future.”

Hysteria

Silicon Valley Bank officials, according to Jeff Sonnenfeld, CEO of Yale School of Management’s Chief Executive Leadership Institute (CELI), deserve to be admonished for their “tone-deaf, failed execution.”

In a joint statement, Sonnenfeld and CELI’s research director, Steven Lian, stated:

“Someone lit a match and the bank yelled, ‘Fire!’ – pulling the alarms in earnest out of genuine concern for transparency and honesty.”

Sonnenfeld and Tian said it was unnecessary to disclose the $2.25 billion unsubscribed capital offering on Wednesday night.

They noted that Silicon Valley Bank had sufficient capital in excess of regulatory requirements.

They also said that the $1.8 billion deficit was unnecessary to reveal.

The one-two blow, according to Sonnenfeld and Tian, sparked a massive frenzy, culminating in a rush to withdraw deposits.

They went on to suggest that the bank may have spaced the statements by at least one or two weeks, which would have lessened the impact.

On Sunday, President Joe Biden’s administration announced a rescue plan for Silicon Valley Bank depositors.

Biden also announced that the US government will undertake an extensive inquiry of all parties involved in the SVB catastrophe.

He released a statement saying:

“I am firmly committed to holding those responsible for this mess fully accountable and to continuing our efforts to strengthen oversight and regulation of larger banks so that we are not in this position again.”

The Fed’s involvement

According to Jeff Sonnenfeld and Steven Lian, Jerome Powell, the Chairman of the Federal Reserve and Biden’s choice to lead the Feds, and his colleagues bear some of the blame.

“There should be no mistaking that Silicon Valley Bank’s collapse was a direct result of the Fed’s persistent and excessive interest rate hike,” they wrote.

They stated that the Fed’s attempts to keep inflation under control affected two things:

The value of the bonds Silicon Valley Bank was relying on for capital
The value of the tech startups SVB catered

Silicon Valley Bank, on the other hand, had more than a year to prepare for and deal with the problems.

The anonymous SVB employee called the bank’s manipulation of its balance sheet “stupidity,” casting doubt on the CEO and CFO’s strategy.

But nevertheless, the employee, who is also a Wall Street veteran, believes the bank’s downfall was the result of mistakes and “naivety” rather than illegal activity.

“The saddest thing is that this place is Boy Scouts,” they said.

“They made mistakes, but these are not bad people.”

Tag: SVB