First Republic: A tale of a fake bank & a fake auction
True story on America's 14th largest bank
Gold and silver thrive after bank failures. At least that’s what I noticed so far. Every time they fail, precious metals go up the next day. Precious metals are not good inflation hedges. But, they are definitely great recession hedges. And there is more money to be made in silver. But I digress.
Over the weekend, the government euthanized First Republic Bank ($FRC). They laid this dog to rest. And they fed its carcass to JP Morgan.
FRC’s demise was widely anticipated. Every fool on Twitter knew. And like Silvergate Bank, a poor earnings reports was the last straw. Earning report came out Monday. The bank was dead by Sunday.
Funnily, the government loves to close banks over the weekend. Its harder to make transactions over the weekend. Slows panic and bank runs.
At time of death, FRC was the 14th largest bank in America. 84 branches. Larger than Silicon Valley Bank, actually. Although you won’t be able to guess by comparing the headlines. Because the story gets darker. There is no better banking story than FRC to describe the problem with fractional reserve banking.
A fake bank
FRC wasn’t really a bank. FRC was a front to print money for rich people. How?
FRC gathered rich people and used their deposits to fund their mortgages. The bank operated by giving extreme-low-interest mortgages to rich people. With no principal payments for 10 years! That meant no money for FRC. You see, FRC wasn’t ever intending to succeed. A front for rich people to loot.
Like other bank executives. Like Mark Zuckerberg. Like Goldman Sachs president. The richest zip codes in Long Island, Manhattan, Beverly Hills, and so on. They were all in on it.
It was a simple non-binding exchange. Rich people keep their deposits at FRC. FRC provides wealthy individuals with low-cost mortgages. And of course, when FRC failed, the government protects the depositors. It was a scam from beginning to end.
So, obviously the bank wasn’t ever going to make money from these loans. Heck, it can’t even beat inflation! And banks make money by selling mortgage agreements to other banks. Except no other bank wanted to touch these garbage loans. Not even the government could buy them as Fannie Mae and Freddie Mac only buy mortgages below $1.09 million, not extreme rich people’s mortgages! Even riba-eating has standards!!
More than half of these loans were mortgages with less than 2.89% interest.
$19 billion loss from mortgages (unrealized)
$4.8 billion loss from bad investments in bonds
When Federal Reserve raised rates, depositors moved money to other banks for better returns. Why stay at First Republic, when other banks offer higher interest for your deposits?
Silicon Valley Bank’s collapse was the Pandora’s box for bank runs. FRC’s bad loans were well-known by this point. The bank should have been dead. But big banks loaned $30 billion to support its deposits. A zombie bank. When your name is on the newspaper, its time to call it quits.
FRC couldn’t hide for long. They were forced to disclose the withdrawal frenzy in its last quarterly report. Admitting to losing 41% of their deposits. Six days later, the bank failed. At its demise, they lost 52% of their deposits. In total, the bank stampede led to $84 billion pulled out.
Losers
This made me smile. First Republic shareholders lost everything.
Winners, and more losers
JP Morgan bought the bank. The government sweetened the deal with a 5-year $50 billion fixed rate loan. And the government promised to cover 80% of losses from the bank’s terrible mortgage portfolio. Essentially, the government printed money and gave it to JP Morgan. To be exact, JP Morgan paid $10.6 billion to get $18 billion in the future. And then, the government added in $2 billions in “restructuring costs”.
And that’s how the government printed money for JP Morgan. Quite frankly, I don’t find blatant money printing that fascinating. Does your wallet feel lighter, though?
A fake auction
More interesting, however.
FRC's failure was predictable. Potential buyers wanted the bank to fail before purchasing it. Why would they wait for the bank to fail? Because everyone knew the government was going to print money and sweeten the deal, only if the bank failed. The other banks weren’t squeezing FRC. They were squeezing the US government. They were squeezing you — the taxpayer.
And that’s how JP Morgan saved America! The New York Times described him as a public servant! By buying FRC on a sweetheart deal. A rigged auction, my friends.
I know corruption can be disheartening. But don’t be sad.
At least, this scam has come to an end. Plenty more bank failures left. I promise. Allah destroys riba. And Allah does not fail in His Promise.
This is part of my series on Interest Free Zone: All of the Sahih hadith related to riba, A study of weak hadith on riba, Defining riba, A detailed breakdown on why Islamic mortgages are backdoor riba, Do credit card rewards programs have riba?, Madness on options riba
Related, I have a Riba and Ruin series: Economics is to keep you a dummy, What happened to SVB?, Ward of the State, First Republic: A tale of a fake bank & a fake auction, Hush, hush, a small bank goes poof
Related, I have a Selling Islam series: Salaried Shaykhs, Can paid Shaykhs make mistakes?
References
Buhayar, N., Surane, J., Reyes, M., & Choi, A. (2023, April 16). First Republic worked hard to woo rich clients. It was the bank’s undoing. Bloomberg.com. https://www.bloomberg.com/news/articles/2023-04-16/first-republic-s-loans-to-rich-clients-drag-earnings-hinder-potential-sale?sref=qorXcFFu&leadSource=uverify+wall
Cohan, P. (2023, May 2). JPMorgan buys First Republic with lessons to consider from 2008. Forbes. https://www.forbes.com/sites/petercohan/2023/05/01/jpmorgan-buys-first-republic-with-lessons-to-consider-from-2008/?sh=5c3c6c822386
Ensign, R. L., Brown, E., Andriotis, A., & Heeb, G. (2023, May 1). Why First Republic bank collapsed. WSJ. https://www.wsj.com/articles/first-republic-bank-collapse-why-banking-crisis-61660d96
Demos, T. (2023, April 27). Why no buyer has emerged for First Republic. The Wall Street Journal. https://www.wsj.com/articles/why-no-buyer-has-emerged-for-first-republic-9909b8b7
Levitt, H., Surane, J., Basak, S., & Bloomberg. (2023, May 1). Lending mortgages to Rich Silicon Valley home buyers was part of First Republic Bank's DNA-and helped contribute to its collapse. Fortune. https://fortune.com/2023/05/01/first-republic-bank-mortgage-lending-liabilities/
Neubauer, K. (n.d.). US government entities Fannie Mae and Freddie Mac were just cleared to purchase mortgages of over $1 million for the first time because home prices are still so high. Business Insider. https://www.businessinsider.com/government-entities-buy-million-dollar-mortgages-2023-2022-11
Turner, M. (n.d.). First republic handed out billions in ultra-low-rate mortgages to the wealthy, it backfired horribly. Business Insider. https://www.businessinsider.com/why-first-republic-bank-in-trouble-mortgages-backfired-rising-rates-2023-4
Weil, J. (2023, March 24). First republic hit by Silicon Valley Bank failure. The Wall Street Journal. https://www.wsj.com/articles/first-republic-hit-by-svb-failure-7431495e