Embattled First Republic Bank is no longer searching for a buyer as investment advisors and company executives seek to repair the company’s balance sheet before any sale might take place, FOX Business has learned.
The decision to pull it off the market, which was first reported Tuesday on The Claman Countdown, was made for a variety of reasons, according to people with direct knowledge of the matter. The bank has as much as a $12 billion hole in its balance sheet because of underwater assets and loans losses in a rising interest rate environment, these people say.
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Potential buyers would have to write-down those losses and several interested parties that have eyed the bank want the reassurance of a government backstop for them, they add. But the Biden Administration is refusing such a move; officials at the Treasury Department and the Federal Deposit Insurance Corp., will only give assistance in a distressed situation, where the bank falls into receivership and equity is wiped out, as in the cases of ill-fated Silicon Valley and Signature banks.
As Fox Business has reported, advisers for First Republic are also weighing a number of ways to fix First Republic’s balance sheet in preparation for a sale, or possibly to allow the bank remain independent if no buyer can be sound. They include seeking additional capital from the federal government in exchange for warrants in the bank.
“The deep uncertainty with respect to the collateral backing any kind of real estate in a loan book is likely the reason why First Republic is having a hard time finding a buyer,” said Danielle DiMartino Booth, chief strategist at Quill Intelligence and former advisor to the Dallas Federal Reserve. “Loans that must be repriced are subject to the interest rate hit that will slash the value of banks’ risk-free securities as well as the unknown losses tied to loans’ underlying collateral.”
A spokesperson for First Republic declined comment. Spokespeople for the Federal Reserve and the Treasury did not immediately respond to request for comment.
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Following the news, shares of First Republic spiked 3% on Wednesday, despite falling over 88% in the past month.
Even with the limited assistance, the Biden administration has been criticized over its efforts to shore up the banking system, which might account for its reluctance to bailout First Republic despite the possibility that its failure could lead to other banks failures in the months to come.
With Silicon Valley and Signature, the FDIC and the Federal Reserve invoked a clause in the federal banking laws that allowed officials to deem those banks “systematically important institutions.” As a result, after their collapse earlier in the month, the FDIC was allowed to cover all deposits at the banks, even those above its $250,000 limit.
The move was controversial because most depositors weren’t small savers but Silicon Valley portfolio companies of venture capital and private equity firms—many of them contributors to President Biden—who had deposits well in excess of $250,000.
The banking tumult has largely effected mid-sized institutions, though First Republic, with more than $200 billion in assets, is still among the biggest banks in the country. Mid-sized banks, like many retail investors trading risky meme stock and crypto, feasted off of the Fed’s easy money policies and the federal government’s massive fiscal spending. The companies had no shortage of capital to expand.
In the banking system, deposits swelled, and in order to attract customers, the banks began making loans to riskier clients like unprofitable tech outfits and at more favorable terms.
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When inflation set in and the Fed tightened monetary policy with higher interest rates, just the opposite happened. Meme stocks and crypto corrected and are now well off their highs. Meanwhile, early-stage VC companies faced tighter lending standards and struggled to make a profit and pay back past borrowings. Initial public offerings dried up, meaning these companies couldn’t raise equity capital and faced a cash crunch.
The banks themselves held capital in the form of treasury debt and mortgage-backed securities, both highly sensitive to interest rates. Then rumors began the spread about the health of such banks over their loan portfolios. Depositors yanked their money from accounts, forcing the banks to sell their under-water government bonds at a loss. When banks began unloading bonds at depressed prices that led to the swift implosion of Silicon Valley and Signature banks earlier in the month.
Federal banking regulators are hoping the panic is subsiding with the emergency efforts. To help banks pay for the fleeing deposits and remain solvent, the Federal Reserve has created a lending program; banks will receive par for their debt as a one-year loan instead of selling it at market price. Banking regulators are weighing other measures such as seeking congressional authority to cover all deposits, even those above $250,000.
The optimism may be misplaced, say bankers who have looked at First Republic’s finances and those of other troubled institutions. They believe many banks have similar balance sheet woes where their loan portfolios are depressed by declining real estate values and lower profits of borrowing companies who received loans at very favorable terms . For instance, Facebook founder and Meta CEO Mark Zuckerberg received a paltry 1.5% fixed-rate mortgage on a loan for $5.95 million to finance his five-bedroom Palo Alto mansion from First Republic. The so-called Fed Funds rates, or the base rate for interest rates set by the Federal Reserve, is currently at 5%.
In an attempt to quell additional panic, several large banks led by JP Morgan launched a private sector bailout of First Republic, funneling $30 trillion on deposits into its coffers depleted by depositor withdrawals earlier in the month. The group has until recently tried to unload First Republic to a buyer. Among the interested parties have been Goldman Sachs, and the private equity firm run by former Treasury Secretary Steve Mnuchin (both didn’t return calls for comment).
But people close to JP Morgan’s efforts say no buyer has been willing to complete the deal without a government backstop on losses.
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“Federal regulators have been completely asleep at the wheel,” said Christopher Whalen. “The scale of the Fed’s quantitative easing coupled with rapidly rising interest rates mixed with a handful of bad bets caused these failures.”