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Here’s why the ‘too big to fail’ banks bailed out First Republic

A consortium of 11 giant banks that are ostensibly in competition with one another came together Thursday to bail out one of their own, the California-based First Republic, in order to help stabilize the teetering U.S. financial system.

The $30 billion transfer to First Republic by banks including JPMorgan, Citigroup and other banking juggernauts that were deemed “too big to fail” in the wake of the 2008 financial crisis is spurring a flight of deposits away from smaller lenders.

It is also raising eyebrows about the relationship between Wall Street and the federal government.

The private-sector rescue came just days after a public-sector bailout of Silicon Valley Bank (SVB) and Signature Bank by the Federal Deposit Insurance Corporation (FDIC), Federal Reserve and Treasury Department.

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In that deal, taxpayer money is being used to backstop a federal line of credit extended to ailing banks.

Administration officials maintain the move to save First Republic was done at the initiative of the financial sector, but multiple outlets reported that Treasury Secretary Janet Yellen leaned on JPMorgan CEO Jamie Dimon to get the deal done.

The effects of the news on the beleaguered First Republic, which had at one point lost 80 percent of its share value since Monday, were immediate.

First Republic stock rose 10 percent on news of the rescue package on Thursday but was down more than 30 percent during trading on Friday.

Here’s what you need to know about the latest bank rescue and what it means for the relationship between the government and big finance.

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Federal Reserve Chairman Jerome Powell
Federal Reserve Chairman Jerome Powell arrives to discuss his semiannual Monetary Policy Report to Congress before the Senate Banking, Housing, and Urban Affairs Committee on Tuesday, March 7, 2023.

Private banks say the bailout was their idea, but reporting indicates otherwise

Representatives for the banking industry told The Hill that the $30 billion bailout for First Republic was the banks’ idea and that the move was designed to stabilize the financial sector in the interests of the broader economy.

The economy has been under pressure from eight consecutive interest rate hikes by the Federal Reserve.

U.S. officials have repeated this line, saying they’re supportive of the move but not responsible for it.

“This show of support by a group of large banks is most welcome, and demonstrates the resilience of the banking system,” a Thursday statement from the Treasury and other government agencies reads.

But reporting by The New York Times and other outlets indicates that the private-sector bailout was Yellen’s idea and that she suggested it to JPMorgan’s Dimon, who then corralled industry leaders to pony up the funds.

A rescue in real-time: Megabanks bail out First Republic

“Despite still feeling bruised by the fallout from JPMorgan’s rescues of Washington Mutual and Bear Stearns during the 2008 financial crisis, Dimon started calling other C.E.O.s to raise the money,” the Times reported in its Dealbook newsletter on Friday.

“Jamie Dimon and Janet Yellen were on a call Tuesday, when she floated an idea: What if the nation’s largest lenders deposited billions of dollars into First Republic Bank, the latest firm getting nudged toward the brink by a depositor panic,” Bloomberg News reported Thursday.

Treasury Secretary Janet Yellen arrives for a Senate Finance Committee hearing
Treasury Secretary Janet Yellen arrives for a Senate Finance Committee hearing to discuss President Biden’s fiscal 2024 budget on Thursday, March 16, 2023. Annabelle Gordon

The rescue avoided another appeal to taxpayer funds

The private rescue takes taxpayers off the hook for yet another bank failure, just days after their money was put up to insure rich depositors from the venture capital industry at SVB.

Political blowback from a second round of public bank bailouts may have been what the Biden administration was trying to avoid in asking private bankers for their help.

“This First Republic thing, it’s disappointing,” former FDIC Chairwoman Sheila Bair said on the CNBC television network on Friday. “I’m glad at least they didn’t use government support, that the private banks came in to try to stabilize it, but it’s not clear it’s working. The problem is with this that fear becomes the major issue.”

“This is a classic Jimmy Stewart problem,” she added, referring to the famous pop culture example of a bank run in the classic Christmas film “It’s a Wonderful Life.”

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Bair said that people need to understand that deposits in a bank aren’t simply locked up safe, but are reinvested in ventures that carry varying degrees of risk.