I think the upside all goes to JPMorgan.
>> That's fascinating Brammo, well, that fascinating.
>> Especially because in the stories,
it actually said they shared the upside as well as the downside.
So it's confusing that basically JPMorgan ends up with the entirety of
the upside at a time where the FDIC wants to mitigate socializing the losses and
privatizing the gains.
>> You heard that right.
JPMorgan Chase, which has agreed to purchase First Republic Bank,
will get all of the upside of purchasing the bank while we get to share the losses.
[LAUGH] So we'll get to the details on how that works in just a moment.
But before we do, some context about First Republic Bank and how it was flailing.
So it will go down in history as the second largest US Bank to collapse after
Washington Mutual Bank in 2008.
That was during the economic collapse of 2008.
Now, 84 First Republic Bank branches in eight states
reopened this morning as JPMorgan Chase branches.
The Federal Deposit Insurance Corporation, or the FDIC,
seized control of the troubled First Republic Bank and sold it to Chase.
So what exactly happened?
What transpired here?
So their assets were apparently battered due to the rise in interest rates,
similar to what we saw with Silicon Valley Bank.
They struggled to stay alive after the two other lenders collapsed last month.
So remember, there was some concern that the Silicon Valley Bank collapsing
would lead to a snowball effect and more of these regional banks would collapse.
And so the FDIC estimated that its insurance fund would have to pay
out about $13 billion to cover First Republic's losses.
JPMorgan also said that the FDIC would provide it with $50 billion in financing.
So First Republic failed despite having received some money recently,
a $30 billion lifeline from eleven of the country's largest banks in March.
JPMorgan said the 30 billion would be repaid after the deal.
Now, before I toss to you, Cenk, I wanna go to the next video because you'll
get a little more of an explanation as to why it is that we get to share the losses,
whereas JPMorgan Chase gets to privatize the benefits of this sale.
Let's watch.
>> JPMorgan and the FDIC have agreed to share the burden of losses.
What does that actually mean in practice?
Can you explain that for our audience?
>> Sure, so as JPM now has the assets and deposits, they will work through those and
particularly loans.
As they collect those loans, there'll be a loss share agreement for
any losses that come out and then that will be shared with the FDIC.
It's very similar to what we had in 2008/9 and 10.
Typically, the assets back then were much worse.
These are assets that are simply marked for interest rate risk, not for
credit risk.
So ultimately, I think you'll see JPMorgan sit with these assets and sell them and
move forward.
It's possible that much of what they are holding here comes back to them in
the next twelve to 18 months.
If interest rates change and the Fed changes policy, perhaps a quarter or
two from now, that's gonna have a sea change to how these assets are valued.
So timing is everything.
And I think that's ultimately why the bid end up being less of a discount for
JPMorgan than the other banks.
>> Do they share the upside as well then, Chris?
>> They capture most of the upside.
So I think the upside all goes to JPMorgan.
>> Okay, so, Cenk, I'm I'm curious how that works, because the majority of their
assets have to do with jumbo loans for mortgages, right?
And so I'm guessing that their assets took a nosedive as a result of the higher
interest rates.
But if JPMorgan Chase holds onto those assets as interest rates change,
maybe get lower, then the value of those assets go up.
Am I understanding that correctly?
>> Yes, but this one really is confusing.
So I'm gonna start by making things some portions of it simple, and
then we'll get to the hard stuff, okay?
And I'll try to answer Ana's question too.
So, first of all, the best news is that
the FDIC does not take money from taxpayers.
The FDIC is actually powered by money that it takes from banks to cover for
insurance in case of a situation like this.
So they'll use some of the assets that they have allocated for
that reason in the past, and they'll rebuild those assets as they go forward in
case there's another bank collapse.
So that's probably the most important part of the story.
Now, normally, though, when there's any kind of organization that gets involved,
they will get most of the upside if they finance it.
In this case, it's a really weird situation cuz the FDIC is largely
taking the losses, but that's collectively a pool of banks.
So for them to own anything is kind of weird.
But usually when the government does a bailout,
we should get at least a huge portion of the proceeds, but we never do.
But in this case, it's more complicated cuz of the FDIC rather than
the Treasury Department, which is us, the taxpayers, okay?
So when you get into the detail, for example,
they say FDIC has already paid out $13 billion and
JPMorgan Chase is gonna pay out 10.6.
But that is not at all clear.
And to be honest with you guys, I'm not clear why they're paying out anything,
because they could just take the deposits of First Republic and
move them to JPMorgan, then they don't have to pay them out.
>> Right.
>> Right, but in this case, for whatever reason, maybe because First Republic was
taken over already and there was already a panic,
they've already paid out the 13 billion, so it's already gone.
But again, it's from the FDIC, okay?
So I know that it's good for
JPMorgan Chase because their stock price went up significantly today.
>> Yeah. >> Okay.
>> I mean, the biggest bank just got bigger, let's keep it real.
>> That's the second biggest takeaway for sure, right?
We'll come back to that too.
But in terms of the other banks,
there was two other banks that were competing to pick up First Republic.
Why were they competing?
Because the government, along with the FDIC was making sure the terms were so
favorable that the banks would want to pick it up, right.
And they're trying to incentivize the banks cuz the banks don't want the losses.
But when the other two lost out the JPMorgan Chase,
their stock price went down.
So, you know this was a really good deal for
whoever was acquiring First Republic cuz basically the government inured it.
Now, in terms of why they got into trouble in the first place, First Republic, so
there's a couple of factors.
One is those mortgages that Ana's talking about, if you have a fixed mortgage and
it's at 2% and now the interest rate is 7%, the bank has to honor the 2% for
30 years or whatever, right?
Meanwhile, their cost of money is 7%.
So that's a giant problem for the banks.
There's a second problem with interest rates.
When the banks, especially Silicon Valley Bank,
took the money and in order to have cash bought treasuries.
They bought the treasuries at a low interest rate, when they needed to
sell it, it was at a high interest rate, and that caused massive losses for them.
So those two things combining is what caused the problem for
the banks in the first place.
Finally, Jamie Dimon and government officials swear up and
down that and take it for what it's worth that it's over now,
that there's not gonna be any more banks that are in trouble.
So they took out two in the first round, they's the third one they've taken out.
And First Republic, by the way,
is the second biggest bank in American history to go under.
And so they say the rest of the banking system is relatively sound, so
we're gonna be okay.
Let's hope they're right.
Obviously, from the outside, it's nearly impossible to determine that.
But the one thing that is super clear is what Ana mentioned,
which is now the big banks are getting bigger and bigger.
And that's exactly what I warned about during the Silicon Valley Bank collapse,
especially if you didn't guarantee the deposits,
all the money was gonna go to the top banks like JPMorgan Chase, and
they were gonna be even more colossal than they already are.
And now we're headed in that direction.
>> Right, and so let's talk about the downsides of having colossal banks,
like banks that continue to accumulate power, continue to get bigger.
First of all, as individuals who might need to take out loans for
whatever reason, whether it be home loans,
whether it be a loan that you might need to start a business, it becomes more and
more difficult to do so because there's less competition, right?
[LAUGH] So Chase can decide, no,
we're gonna be a lot more strict and a lot more difficult when it comes
to giving loans to individuals who might need it for whatever reason.
So there's that issue.
And when a bank accumulates power in a country that has corruption baked
into its system, who's to say that JPMorgan Chase won't successfully
lead to more deregulation of the banking sector, and essentially pave the way for
more questionable activity that leads to economic collapse,
like we experienced in 2008.
>> Yeah, and they become even bigger, so too big to fail gets worse.
>> Yes.
>> And so that means that if the big banks have problems, we're all screwed.
And we end up paying for the bailout.
>> 100%.
>> Because not paying for the bailout would mean even more severe collapse.
>> Look, we had to have fixed this in 2008 and we didn't.
>> No, we didn't. >> We just dropped the ball.
Obama passed some weak regulations and called it historic.
And the reality is, they never fixed too big to fail.
Now they're way bigger than they were when they collapsed in 2008.
So that only leaves us two choices if something goes wrong with the big banks,
either complete global economic collapse as there's run on banks all across
the world, that's total devastation.
Or the American taxpayer is gonna have to bail out the richest executives in
the world.
And by the way, the Silicon Valley Bank executives for all these years,
they took home all that salary and all those bonuses.
And when they went under, we didn't get any of it back.
>> No, we didn't.
So a few other things I wanna mention, because I think it is important to add and
reinforce the point about how we didn't fix things after 2008.
In fact, just last week, the Federal Reserve and
the FDIC published reports criticizing themselves for
failing to adequately regulate Silicon Valley Bank and Signature Bank.
So I wanna read from the New York Times on this.
They write that a sweeping and highly critical review conducted by Michael Barr,
the Fed's Vice Chair for Supervision, identified lax oversight of
Silicon Valley Bank and said its collapse demonstrated weaknesses in regulation and
supervision that must be addressed.
He further writes, regulatory standards for Silicon Valley Bank were too low,
the supervision of Silicon Valley Bank did not work with sufficient force and
urgency, and contagion from the firm's failure posed systemic consequences not
contemplated by the Federal Reserve's tailoring framework.
I should also note, by the way, that Silicon Valley Bank and
smaller regional banks like Silicon Valley Bank, were deregulated in 2018.
So they were further deregulated after the incredibly weak DoddFrank
banking regulations that passed in 2009, I believe it was.
So these are the consequences.
We know that the lack of regulation is a huge problem here and
now we have some admissions, at least from the Federal Reserve and the FDIC.
>> So one last thing about that Federal Reserve report.
Michael Barr basically blamed the Trump administration for
not doing any oversight.
And the article noted that Barr only came in in July, I believe, of 2022.
So mid 2022, so there wasn't much you could do.
I thought, well, you got this report straight from Barr,
because that is very favorable framing for Barr.
The reality is, if you were here in July of 22,
you had a lot of time to regulate them, and you didn't, okay?
So it's not like the Democrats aren't also culpable,
it's not like Barr isn't culpable, etc.
But he's not wrong about the fact that Trump deregulated and
basically said, these are great rich people,
they'll regulate themselves, it'll be fine, and it wasn't.
>> It's also really important to remember, just simply saying,
Trump deregulated, I think omits really important details.
This was a bipartisan effort in Congress.
You had Democrats voting for the deregulation as well.
The bill makes its way to Trump's desk, and Trump signs the deregulation into law,
that's how it worked.
So did Trump want the deregulation?
Absolutely, but let's not also forget that there's a huge problem with
corporatist Democrats in Congress who love the deregulation and
who love to hand out cookies to members of the financial sector.
>> And now when the Federal Reserve suggested a little bit tighter regulation
just because, hey, we don't want nonstop collapses,
just the bare minimum, Republicans in the Senate are outraged, and
they do not want more regulation of these out of control banks.
>> What a shocke, wow.
>> I mean, guys, if you don't know that the Republicans en masse and
a huge portion of the Democrats, completely work for
their donors, including the giant banks,
you must be a journalist in Washington, cuz everyone else in the country knows.
>> Now, finally, something that I'm gonna dig into for tomorrow's show, but
here's a little sneak peek, if you will.
Unusual Wales, one of my favorite Twitter accounts,
tweeted this in regard to this banking story.
Breaking news, another congressman literally traded banking stock again.
Lois Frankel sold FRC, so I'm guessing that's the bank that just collapsed.
>> First Republic. >> First Republic, yes, on March 16,
avoiding the remaining 80% drop.
She then bought JP Morgan stock, the bank buying First Republic on March 22.
>> [LAUGH] >> Wow, so convenient.
So convenient, what a coincidence, goddamn.
>> I mean, look, there's polls out every day that show the American people have no
trust left in media, politics, etc.
>> They shouldn't.
>> And the media looks at and goes,
I wonder what's wrong with the American public?
No, the question is, what's wrong with you?
>> Totally.
>> Okay, I mean, look at how obviously corrupt the politicians are.
So brazen, barely covered in the press,
treated like heroes and honest actors who are debating issues.
Gee, should we do regulation?
No, they're crooks.
They took bribes from the banks, that's why they don't wanna regulate them.
And then they do trading on their insider >> They do insider trading so
brazenly and they do it repeatedly.
Repeatedly, they don't care, they know nothing's gonna happen to them.
They do this with impunity, whereas any other ordinary American
trading on insider information would go to prison in.
Just ask Paul Giamati, okay?
>> [LAUGH] >> So reference to Billions.