Bankers’ pitch to save First Republic: Help us now, or pay more later when it fails
Big bank doubts
While the exact contour of any deal is a matter for negotiation and could include a special purpose vehicle or direct purchases, several possibilities address the bank’s ailing balance sheet. The bank is weighing the sale of $50 billion to $100 billion in debt, Bloomberg reported Tuesday.
First Republic loaded up on low-yielding assets including Treasurys, municipal bonds and mortgages, making what was essentially a bet that interest rates wouldn’t rise. When they did, the bank found itself with tens of billions of dollars in losses.
By drastically reducing the size of its balance sheet, the bank’s capital ratios will suddenly be far healthier, paving the way for it to raise more funds and continue as an independent company.
Other possible, but less likely moves include converting the big bank’s deposits into equity, or even finding a buyer. But a suitor hasn’t emerged in the past month, and isn’t likely given that any purchaser would also own the losses on First Republic’s balance sheet.
That has led sources close to the big banks to believe that the most likely scenario for First Republic is government receivership, which is how SVB and Signature were resolved.
Those close to the banks were hesitant to endorse a plan in which they would have to recognize losses for overpaying for bonds. They also expressed distrust of government-brokered deals after some of the pacts from the 2008 financial crisis ended up being costlier than expected.
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