A Sinking Ship

Lehman Bros. filed for bankruptcy on Sept. 15, 2008, six months after Bear Stearns collapsed on March 16.?

Dick Fuld, Lehman's CEO, had worked tirelessly for months to save his firm. He courted the British bank Barclays and the Korean Development Bank as possible buyers before he and Lehman’s board declared bankruptcy at the urging of the Securities and Exchange Commission and the Federal Reserve Bank of New York.???

Fuld “did make errors, to be sure — some out of loyalty, some out of hubris, and even some, possibly, out of naivete,” writes Andrew Ross Sorkin in Too Big to Fail. Fuld had worked at Lehman for almost 40 years, starting as a summer intern in 1969. Unlike some of the troubled banks seen during the 2008-09 financial crisis, “Fuld seems to have been driven less by greed than by an overpowering desire to preserve the firm he loved.”

The circumstances are drastically different, but I couldn’t help thinking about Fuld and Lehman when I woke up Monday to discover that First Republic Bank entered an agreement with the FDIC to purchase most of the San Francisco bank’s deposits and assets.

I’ve never interviewed First Republic Executive Chairman Jim Herbert, but I’m struck by some similarities with Fuld. Herbert served as CEO until 2022, and founded First Republic, which focused on high net worth clients, in 1985 — almost 40 years ago.?

Herbert spent the last several weeks working feverishly to save his bank.??

“Herbert was involved in desperate efforts to arrange a private-sector solution,” according to the American Banker. “But after those efforts failed, he was left to watch as the Federal Deposit Insurance Corp. seized the bank and sold it to JPMorgan Chase.”?

Last week, First Republic announced a loss of $100 billion in deposits in the first quarter, despite a $30 billion injection of uninsured deposits from the biggest U.S. banks in March. A buyer didn’t look likely due to the losses an acquirer would have to book on low-rate, long-term loans — the asset/liability mismatch that plagued Silicon Valley Bank leading into its own deposit run.

Back in 2008, one of the barriers to buying Lehman and its toxic assets was regulators’ unwillingness to give buyers what Sorkin calls a “Jamie deal.” Months prior, JPMorgan Chase & Co. bought Bear Stearns for a song, paying $10 a share — the stock price for Bear Stearns had peaked above $170 a year earlier. The Fed also financed $30 billion of the investment bank’s toxic assets. (Chase was on the hook for the first $1 billion.)?

JPMorgan Chase CEO Jamie Dimon executed another seemingly sweetheart deal on Monday with the bank’s purchase of First Republic, 15 years after Bear Stearns. Chase agreed to pay $10.6 billion to the FDIC for $173 billion of loans, $30 billion of securities and $92 billion of deposits, per Reuters — minus the $30 billion that came from the big banks. The FDIC will provide loss share agreements for the loans — meaning the agency would absorb a large chunk of any losses should they occur.?

Are more failures ahead? Earlier this week, I’d hoped that First Republic would be the last of the large failures, though recognizing that some smaller failures could occur. The Fed doesn’t look likely to lower rates any time soon, raising the federal funds rate 25 basis points yesterday. And per a recent Gallup poll, Americans are worried about the safety of their money on the heels of the recent bank runs.

Gallup elaborates, "The latest readings are similar to those in 2008. In September of that year, shortly after the collapse of Lehman Brothers, which remains the largest bankruptcy filing in U.S. history, 45% of U.S. adults said they were very or moderately worried about the safety of their money."

The crisis of 2008-09 saw 465 banks fail from 2008 through 2012, per FDIC data. I don’t believe we’re in a true banking crisis — many banks appear safe and sound, though concerns about commercial real estate and credit quality loom. First Republic likely won’t be the last domino to fall.

Coming Up

I’ll be on the road over the next couple of months, speaking at Experience FinXTech in Tampa next week, and in June, at Bank Director 's Bank Audit & Risk Conference in Chicago and the Tennessee Bankers Association 's annual event in Palm Beach, Florida. I know we’ll be talking about the three recent bank failures and what the fallout could be for the industry.?

I’d love to see you at any of these events. Drop me a line in the comments if you’d like to connect.?

What I’m Reading

“Washington typically tends not to notice much until an actual crisis is at hand,” writes Sorkin in Too Big to Fail. Again, I don’t think we’re in a crisis, at least not yet. But it looks like the regulators are now wide awake. The Federal Reserve and FDIC released their breakdowns of the failures at Silicon Valley Bank and Signature Bank, and they’re must-reads — as well as the GAO report on these failures.