People walk past JPMorgan Chase and Co’s headquarters in New York. — Bloomberg
NEW YORK: JPMorgan Chase and Co won the bidding to acquire First Republic Bank in an emergency government-led intervention after private rescue efforts failed to fill a hole in the troubled lender’s balance sheet and customers yanked their deposits.
JPMorgan will take over First Republic’s assets, including about US$173bil (RM771bil) of loans and US$30bil (RM133.7bil) of securities, as well as US$92bil (RM410bil) in deposits.
JPMorgan and the Federal Deposit Insurance Corp (FDIC), which orchestrated the sale, agreed to share the burden of losses, as well as any recoveries, on the firm’s single-family and commercial loans, the agency said yesterday in a statement.
“Our government invited us and others to step up, and we did,” JPMorgan chief executive officer Jamie Dimon said in a statement. “Our financial strength, capabilities and business model allowed us to develop a bid to execute the transaction in a way to minimise costs to the Deposit Insurance Fund.”
Shares of First Republic tumbled more than 33% during premarket trading, putting it on track to extend this year’s 97% slump. JPMorgan’s stock rose 3.8%.
The transaction makes JPMorgan, the nation’s largest bank, even more massive, an outcome government officials have taken pains to avoid in the past.
Because of US regulatory restrictions, JPMorgan’s size and its existing share of the US deposit base would prevent it, under normal circumstances, from expanding its deposit base further via an acquisition.
JPMorgan expects to recognise a one-time gain of US$2.6bil (RM11.6bil) tied to the transaction, according to a statement. The bank will make a US$10.6bil (RM47bil) payment to the FDIC and estimates it will incur US$2bil (RM8.9bil) in related restructuring costs over the next 18 months.
The US$92bil (RM410bil) in deposits includes the US$30bil (RM133.7bil) that JPMorgan and other large US banks put into the beleaguered lender in March to try to stabilise its finances.
For the US$173bil (RM771bil) in loans and US$30bil (RM133.7bil) in securities included in the deal, JPMorgan and the FDIC entered into a loss-sharing agreement to cover single-family residential mortgage loans and commercial loans, as well as US$50bil (RM222.8bil) worth of five-year, fixed-rate term financing.
The FDIC and JPMorgan will share in both the losses and the potential recoveries on the loans, with the agency noting it should “maximise recoveries on the assets by keeping them in the private sector.”
The FDIC estimated that the cost to the deposit insurance fund would be about US$13bil (RM57.9bil).
“We should acknowledge that bank failures are inevitable in a dynamic and innovative financial system,” Jonathan McKernan, a member of the FDIC board, said in a statement. — Bloomberg
