May 24, 2024

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Author of What to Eat When You’re Broke and Bloom Where You’re Planted online course

It was only 6 weeks ago when the nation was briefly paralyzed with concern as we watched three banks go under, with their deposits under FDIC control. At the time, I wrote that one of the next banks to fail could be First Republic Bank.

And today may be the day that it does unless there’s a dramatic last-minute save. If it does fail, it will be the second-largest bank failure in American history.

UPDATE: First Republic has failed. The FDIC has taken control of the deposits and sold the bank to JP Morgan. As per Zero Hedge:

In the end, early on Monday morning, the US unveiled a hybrid solution – after all other attempts at a private rescue effort failed – one where the FDIC would seize the insolvent First Republic, the 14th largest US bank by assetsmaking it the second biggest bank failure in US history, and immediately sell the bulk of its assets and all of its deposits to JPMorgan after a sham but “highly competitive bidding process” had taken place over the weekend (one in which virtually nobody wanted to participate as nobody would buy FRC without explicit government backstops, which in the end is precisely what they ended up getting on FRC’s IO and CRE loan portfolio) while keeping FRC’s toxic Interest-only mortgages to Hamptons’ billionaires.

According to the FDIC announcement, JPMorgan would assume all of First Republic’s $92 billion in deposits — insured and uninsured, including the $5 billion in deposits gived by JPM to First Republic on March 16. It is also buying most of the bank’s assets, including about $173 billion in loans and $30 billion in securities.

And the rich get richer.

If you think that your money is safe in the bank, you may want to reconsider. And you may want to do it quickly because just last month, we saw how rapidly the domino effect could take down one after another. (I hold my savings in precious metals. You can learn more here.)

What led up to it?

First Republic’s problems appear to relate to increasing interest rates. CNBC explains:

First Republic is a regional bank that has focused on high-net-worth individuals and their businesses, including offering mortgages at low interest rates to those customers.

Those mortgages, as well as other long-term assets on the bank’s balance sheet, have fallen in market value since the Fed began hiking rates last year, making investors worried that the bank would have to book a sizeable loss if forced to sell those assets to raise cash.

On Friday, stocks for First Republic Bank tanked by 43%. (That’s not the worst of it – stocks have fallen by 97% this year.)

According to Fortune:

A group of 11 banks that deposited $30 billion into First Republic in March — giving it time to find a private-sector solution — have proved reluctant to band together on making a joint investment. A few proposals that surfaced in recent days called for a consortium of stronger banks to buy assets from First Republic for more than their market value. But no agreement materialized.

Instead, some stronger firms have been waiting for the government to offer aid or put the bank in receivership, a resolution they view as cleaner — and potentially ending with a sale of the bank or its pieces at attractive prices.

But receivership is an outcome the FDIC would prefer to avoid, in part because of the prospect it will inflict a multibillion-dollar hit to its own deposit insurance fund. The agency is already planning to impose a special assessment on the industry to cover the cost of SVB and Signature Bank’s failures last month.

For the past month, the FDIC has been scrambling to put together a rescue deal for First Republic, seeking bids from banks like JPMorgan Chase & Co., PNC Financial Services Group Inc., Citizens Financial Group Inc., Bank of America Corp., and US Bancorp. (The latter two declined to bid.) However, the deadline for acceptable bids came and went yesterday with no resolution.

This makes it likely, according to the experts, that the FDIC will seize control of First Republic’s deposits today, putting the beleaguered institution into receivership.

How will this affect the industry?

If last month is anything to go by, the FDIC is likely to cover deposits, even those larger than the officially insured $250,000. It’s how they averted an even bigger panic in March. However, this outcome is not guaranteed. And even if they cover deposits in First Republic, at some point, if too many banks fail, this apparent government generosity will not continue.

And, once again, the failure of one bank is also likely to cause a ripple of other failures, so we could be looking at a bumpy ride this week.

But while everyday folks could be facing major repercussions, people who are already incredibly wealthy could profit immensely from the downfall of the rest of us. In fact, they’re salivating over the prospects.

The banking and investment sector will still come out on top, regardless of the fate of First Republic and other banks. According to Bloomberg:

Even if another set of banks failed—which is a matter of debate—the repercussions won’t be felt across the economy equally.

“Credit will start crunching but not for everyone,” Goldman Sachs analysts wrote in a note last week. “Owing to their greater financial flexibility, large and highly rated firms can adapt to tighter bank lending standards.” That means the biggest banks are set to get bigger, and smaller borrowers who rely on the smallest institutions will find it much more expensive to get access to money…

…Ares Management CEO Michael Arougheti told me in a phone call this morning that his firm believes that the biggest players will be the ones getting money—but that he’s also trying to lend to midsize companies because there’s a chance for him to seize on outsize returns…

…A conversation this week with Blackstone’s Dwight Scott, the firm’s global head of credit, revealed calmer nerves under the surface than what would meet the eye. Blackstone is leaning into the chance to lend to bigger clients who are looking for fresh cash. “I do think we’ll see opportunities out of the banking world. But most importantly, we’re seeing just amazing opportunities out of the corporate world,” he said in a Bloomberg Television interview.

And this isn’t the only way that the industry will profit. They’ll also get money from the government – billions and billions of dollars. Axios reports:

Bank rescues are often seen as government bailouts, while bank failures are seen as being more punitive.

  • In reality, however, the government invariably ends up being extremely generous to the banking sector whenever there’s a failure.

How it works: When a bank fails and is sold by the FDIC in a fire sale, the government is generally forced to throw in billions of dollars’ worth of sweeteners.

  • In the event that happens to First Republic, those sweeteners are likely to be worth roughly $20 billion to whichever acquirer ends up with the bank’s operations…

…It’s not just First Republic’s eventual acquirer who stands to make billions from the deal.

  • A consortium of 11 banks has $30 billion on deposit at First Republic — all of which is uninsured by the FDIC. That money is theoretically at risk if First Republic fails.

  • Realistically, the government will declare a systemic risk exception and insure all those $30 billion in deposits. Those billions will flow from the government — in the form of the FDIC — to America’s biggest banks: JPMorgan, Bank of America, Wells Fargo and Citigroup ($5 billion each); Goldman Sachs and Morgan Stanley ($2.5 billion each); and a group of regional banks, including Truist and PNC, getting $1 billion each.

In summary, getting a new mortgage or car loan will cost far more for average people, which leads to more profit for banks. As well, it will be more difficult to get the loan in the first place, which limits our options.

Meanwhile, the government will throw money at existing banks, and rich people will get richer. There was virtually no risk for the banks attempting to “rescue” First Republic – it was evident to them their billions would be covered.

There are always two sets of rules, and it couldn’t be more clear than this.

Who’s next?

During the failure of SVB, I found a list of banks that were concerning. First Republic was on that list. Here are the others:

Customers Bancorp Inc. of West Reading, PA

First Republic Bank of San Francisco, CA

Sandy Spring Bancorp Inc. of Olney, MD

New York Community Bancorp Inc. of Hicksville, NY

First Foundation Inc. of Dallas, TX

Ally Financial Inc of Detroit, MI

Dime Community Bancshares Inc. of Hauppauge, NY

Pacific Premier Bancorp Inc. of Irvine, CA

Prosperity Bancshare Inc. of Houston, TX

Columbia Financial, Inc. of Fair Lawn, NJ

But these aren’t the only organizations at risk as per Morningstar. These had some of “the highest ratios of negative AOCI to total equity capital less AOCI.”

Comerica Inc. of Dallas, TX

Zions Bancorporation of Salt Lake City, UT

Popular Inc. of  San Juan, PR

KeyCorp of Cleveland, OH

Community Bank System Inc. of DeWitt, NY

Commerce Bancshares Inc. of Kansas City, MO

Cullen/Frost Bankers Inc. of San Antonio, TX

First Financial Bankshares Inc. of Abilene, TX

Eastern Bankshares Inc. of Boston MA

Heartland Financial USA Inc. of Denver, CO

First Bancorp FBNC of Southern Pines, N.C.

Silvergate Capital Corp. of La Jolla, CA

Bank of Hawaii Corp. of Honolulu, HI

Synovus Financial Corp. of Columbus, GA

I have no idea if these will follow the same pattern, but you may want to look into it further if you bank with these companies.

I really limit what I keep in the bank. I find it incredibly concerning that we’re at the mercy of the FDIC. I keep in enough money for my bills for the month and a small amount of savings but I would never dare to leave in my entire life-savings. My non-expert advice is to manage savings in the following order.

  1. Tangible goods (food, land, preps)
  2. Pay off debt (secured debt like mortgage and car payments in particular)
  3. Invest in precious metals (it’s a good way to hold excess money in a physical format that holds its value regardless of what happens to the dollar)

If you’re looking for more information about holding gold and silver, I recommend ITM Trading. They offer very educational strategy sessions with no pressure to purchase. Even if you choose not to invest in metals at this time, you’ll walk away with solid information, and it doesn’t cost a penny. Go here to learn more. (And I couldn’t wait to book your appointment. The last time banks failed, the option to speak to someone was delayed due to high demand.)

You may have put off making decisions on how to handle this but consider another bank failure to be your wake-up call. The failure of three banks in March was not an anomaly. It was the beginning of a trend and there will very likely be more failures to come.

What are your thoughts?

What do you think will happen with First Republic? Do you expect the FDIC to cover deposits again? Is this really just a giant transfer of wealth? And how are you handling your savings right now? Do you still trust our banking industry?

Let’s talk about it in the comments section.

About Daisy

Daisy Luther is a coffee-swigging, adventure-seeking, globe-trotting blogger. She is the founder and publisher of three websites.  1) The Organic Prepper, which is about current events, preparedness, self-reliance, and the pursuit of liberty; 2)  The Frugalite, a website with thrifty tips and solutions to help people get a handle on their personal finances without feeling deprived; and 3) PreppersDailyNews.com, an aggregate site where you can find links to all the most important news for those who wish to be prepared. Her work is widely republished across alternative media and she has appeared in many interviews.

Daisy is the best-selling author of 5 traditionally published books, 12 self-published books, and runs a small digital publishing company with PDF guides, printables, and courses at SelfRelianceand Survival.com You can find her on FacebookPinterest, Gab, MeWe, Parler, Instagram, and Twitter.