First Republic Bank Again Trying to Avoid FDIC Takeover

First Republic Bank (FRB) stock plummeted 49% on Tuesday after reporting a 41% deposit flight ($72 billion) in the first quarter. FRB also said it would reduce its workforce by up to 25%. The troubled bank has already fallen another 28.3% on Wednesday mid-morning at the time of writing and is trading at a record low. Investors believe the bank will need help to avoid collapse and an FDIC takeover.

Bloomberg reported FRB wants to sell $50-100 billion assets to other banks above market value. FRB is making a pay now or pay more later argument. FRB approached its previous rescuers, like JP Morgan Chase, that infused $30 billion in deposits, arguing that they could lose a few billion now or $30 billion later if FRB fails.

FRB is trying to create urgency for the other banks to act. CNBC reported the following quote: “Now that the earnings are out, once you’ve got a window to act, it’s time to do it,” said one of the bankers, who asked for anonymity to speak candidly. “You never know what will happen if you wait, and you don’t want to be dealing with an emergency situation.” The banker may or may not have intended to, but they made the perfect pitch for securing precious metals sooner rather than later.

FRB has struggled since the collapse of Silicon Valley Bank and Signature Bank in March. Deposits have moved from smaller regional banks to “too big to fail banks,” which is the primary catalyst for the current scare. However, FRB's problems were born years ago; they are just starting to come of age.

Like many other banks, FRB purchased large amounts of government Treasuries, municipal bonds, and mortgages before the Federal Reserve raised interest rates at the fastest rate since the 1970s. FRB didn’t believe rising interest rates were a real possibility. FRB thought things would continue as they always had, so they didn't hedge their portfolio correctly for the market cycles. Previously purchased bonds decrease in value when interest rates rise. The higher interest rates have translated into colossal paper losses and dried up liquidity because those assets would need to be sold at a loss. 

There are still real threats and moral hazards in the banking sector. Oversimplifying it, the definition of moral hazard is a lack of incentive to guard against risk because there aren't severe consequences. First Republic, like SVB and Signature Bank, played fast and loose with their portfolio because they believed there wouldn't be severe consequences. The FDIC absolved SVB and Signature depositors of the consequence. FRB is holding the other banks in a hostage-like situation forcing the other banks to either forfeit $ billions now or lose $30 billion in FDIC fees later. It's a high-stakes game of chicken with the global economy as the ante for the bet. It may be time to consider how much cash should be kept in the banking system.

The risks are real, but there is wisdom to be gleaned. As they say, "A fool can only learn from his own mistakes." First Republic, SVB, and Signature Bank’s woes multiplied because they were not adequately diversified and had an inappropriate balance in their portfolios. Instead of building a portfolio that would weather all market conditions, they only thought about short-term gains. 

Precious metals are the safety net and counterbalance to all the chaos of the market. Most investors diversify and put 5-20% of their portfolio into precious metals. Some put more, and some put less, but for most people, it represents the most minor portion of their portfolio. However, as the last year or so has proved, it becomes an essential component for most portfolios when the market goes south. Over the last year, gold is up 4.89%, and the S&P500 is down -2.36%. 

Why not get the excess cash out of the banks and hedge your portfolio today? As the banker wisely said, “You never know what will happen if you wait, and you don’t want to be dealing with an emergency situation.”

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