Rescue of First Republic Was Just a Cash Advance. Final Failure Awaits.

The litany of recent bank failures has become all too familiar. It began in early March with the bankruptcy filing of Silvergate Bank. Silvergate was not just another commercial bank.

It was a traditional FDIC-insured bank, but it was also heavily involved in the cryptocurrency world. It was known as a crypto bank that would lend to crypto exchanges and crypto hedge funds and act as a portal between the dollar system and cryptocurrencies. Silvergate was a casualty of chaos in the crypto markets that began with the 76% collapse of Bitcoin prices between November 2021 and November 2022, then soon spread to the failures of Three Arrows (a crypto hedge fund), Genesis (a crypto exchange), USDC (a stablecoin that “broke the buck” and fell to $0.83), and the mother of all crypto scams, FTX, that may be the greatest financial fraud in history.

Silvergate was the carrier that spread to crash virus from crypto to traditional banks. The next victims were Silicon Valley Bank, Signature Bank, and Credit Suisse. More are on the way.

In the middle of this bank run was the strange case of First Republic Bank. It is clearly under financial stress due to fleeing depositors and underwater long-duration assets. But it has not technically failed. Instead, it was rescued by a consortium of eleven solvent banks putting up cash to bolster First Republic’s liquidity.

The banks, as reported here, were JPMorgan Chase, Citi, Bank of America, Wells Fargo, Morgan Stanley, Goldman Sachs, PNC Financial Services, U.S. Bancorp, Bank of New York Mellon, State Street, and Truist Financial (formerly SunTrust). They put up a total of $30 billion.

Although the Fed was overseeing this rescue, all of the funds were from private banks. So, technically it was not a government bailout. Interestingly, this rescue bears a close resemblance to the 1998 rescue of the hedge fund Long-Term Capital Management (which I negotiated).

That rescue was also encouraged by the Fed but was actually conducted with private funds. The money came from a consortium of 14 banks, including at least seven of the banks in the First Republic rescue. Both the First Republic rescue and the Long-Term Capital rescue were based on Pierpont Morgan’s rescue plan devised during the Panic of 1907.

To this day, that’s still the best playbook if you want to end a financial panic without using government money. Still, there’s one critical difference between Long-Term Capital and First Republic when it comes to rescues. The Long-Term Capital rescue was all capital, no debt. The First Republic rescue is all debt and no capital.

That means it’s not really a rescue; it’s just a cash band-aid. That can buy time, but it’s not the end of the crisis. You’ll be hearing more about a real First Republic bailout in the days ahead.

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