FIRST REPUBLIC BANK - Another Bail-Out
Over the weekend the second-largest bank went bottom up and was seized by the FDIC. This is following the closure of the 3rd and 4th largest banks just a month or so ago (Silicon Valley Bank and Signature Bank). JP Morgan Chase was the purchasing bank that re-allocated 92B in customer deposits and 203B in mixed-use assets.
In this purchase, JP Morgan Chase agreed to pay (yes, actually pay) 10.3B for the purchase, but there is a strategy included. Immediately upon purchase, JP Morgan Chase takes over 2.5B in profit on day one because of the 13B in bond losses from the bank's collateral. This deal was sweetened by the FDIC with 50B in guaranteed financing which, you guessed it, is backed by our lovely taxpayers.
This brings the total losses to 22.5B in losses from Silicon Valley Bank with 19B moved to "special assessment" which will be considered a bank account tax and split up over the next 4 years to not spook depositors too much. The new total after this consolidation is 63B in losses and 30B in guaranteed funded by FDIC (taxpayers).
Next on the list which is at risk is Western Alliance (Ticker: WAL) with 69k in customer deposits and PacWest (Ticker: PACW) with 41B in deposits, which both got hammered today during trading hours due to fear in the regional bank sector.
A recent Stanford study shows that "hundreds to thousands" are in trouble because of the fastest rate hikes in 50 years. These rate hikes have blown up bank bond portfolios, over-exposed bad loans, and wiped away profits that were being earned from near-zero interest rates to clients for years.
US banks are estimated to be sitting on 620B in hidden paper losses from these interest rate hikes in the last 12 months and to put it into perspective, Silicon Valley Bank was estimated to only have 5% of that.
With the Fed meeting soon it begs the question...
80% chance of another small hike and then a cut in late summer, but why cut rates so soon? This can come down to three scenarios;
1) Fed believes that Fed data lags and we are actually winning against the war on inflation,
2) Economy is getting worse by the week and they plan to Panic cut to take some pressure off,
3) Fed wants to get the pain out of the way to coast into the 2024 election on the back of steady rate cuts and Wall Street performance in the hope of immunity come re-election.
What are your thoughts? More to come soon!