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Wall Street keeps winning even in a banking crisis

How JPMorgan, Goldman Sachs, and other banks responded to the troubles of regional banks and how they are now benefiting.??

Jamie Dimon smiling and looking to the right against a red background
Jamie Dimon, chief executive of JPMorgan Chase, helped to put together support for First Republic Bank.
Mike Blake/Reuters
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Silicon Valley Bank customers huddled nervously in the morning air outside closed branches in San Francisco, Boston, and Manhattan last Friday. Customers had pulled out $42 billion the day before, and the bank appeared to be on the brink

In Austin, Texas, fintech entrepreneur Henry Yoshida received a phone message: 

"I just wanted to take a minute to reach back out, obviously with recent news at SVB," the caller said, noting that he remembered that SVB was Yoshida's "partner that you-all used for operating accounts." 

"I just wanted to take a moment to reach out and just see how we might be of assistance to you," the message went on. "If we can maybe potentially have a meeting just to learn if there is an opportunity for us to assist at this point."

The caller was from Bank of America. Yoshida, who founded the startup Rocket Dollar, says he also got a phone call from Wells Fargo that day. 

"It's smart," Yoshida told Insider of the banks' pitches. "Not only are these big banks not sitting around and waiting for the phone to ring, they are also being proactive."

Amid the nation's most troubling turmoil in banking since the global financial crisis nearly 15 years ago, the big banks are flexing their collective muscle. The 2008 financial crisis humbled the banking behemoths; the 2023 crisis of regional banks has now only cemented their power.

Around the time Yoshida received his Bank of America call, the Federal Deposit Insurance Corporation announced that Silicon Valley Bank had been taken over. 

In the days that followed, the 4 biggest banks in the country sucked in billions of dollars in new deposits. Bank of America alone picked up $15 billion in deposits.

And in a telling display of the big banks' enhanced power, 11 of them – led by JPMorgan, Citigroup, Bank of America, and Wells Fargo – on Thursday pumped $30 billion of deposits into another troubled California regional bank, First Republic. 

The events of the past week have shown that the nation's biggest banks are now the only real safe haven for deposits by businesses and consumers. The 10 biggest banks in the country control nearly half of all US deposits, according to FDIC data. Two decades ago, that share was less than a third. For an increasingly stretched financial system, the big banks provide a needed stability.

The big US banks will "emerge, essentially, unscathed," said Douglas Holtz-Eakin, a commissioner on the Financial Crisis Inquiry Commission that examined the 2008 crash who is now the president of a right-leaning think tank, the American Action Forum. "And perhaps with a slight improvement in the public perception of them, because they're going to help out First Republic, and they've done something that gives them something for the regulators to say, 'Thank you.'"

JPMorgan CEO Jamie Dimon got the First Republic rescue rolling when he contacted Treasury Secretary Janet Yellen and Federal Reserve Chairman Jay Powell on Tuesday. Heading to Washington for meetings later in the week with trade associations the Bank Policy Institute and the Business Roundtable, Dimon approached both officials about how to strengthen the banking system's capital base, according to a person with knowledge of the matter. 

Jerome Powell and Janet Yellen
Federal Reserve Chair Jerome Powell, left, and Treasury Secretary Janet Yellen met with Jamie Dimon of JPMorgan about the deposit injection.
Photo by Anna Moneymaker/Getty Images

The officials quickly steered the conversation to the trouble then facing First Republic. Over the course of numerous phone calls on Tuesday, the three brought in FDIC Chairman Martin Gruenberg and hashed out a plan to inject deposits into the regional bank, the person and another briefed on the conversations said. 

On Wednesday, Dimon looped in the CEOs of Bank of America, Citigroup, and Wells Fargo. Other banks soon followed, with many, if not all, having to put the matter in front of their boards of directors for approval. 

While regulators led discussions and ultimately blessed the plan (Dimon met with Yellen in person on Thursday), the rescue showed an emboldened banking sector using their might to come up with a private market solution. And a good thing. President Biden has insisted on limiting the bailouts of the banks for fear of igniting the controversy that followed the 2008 bailouts. 

JPMorgan had already tried once during the week to protect First Republic. On Sunday, the regional bank announced it had received a $70 billion in liquidity  from JPMorgan and the Federal Reserve.

For First Republic shareholders and depositors, it was a welcome sign — along with the news Sunday that the Federal Reserve, Treasury, and FDIC would backstop SVB's deposits — even uninsured ones. But it wasn't enough to quell a week of market turmoil that followed. 

Instead, after more volatile trading in First Republic and other regional bank shares, Dimon came together with Yellen and Powell – "Jamie, Janet, and Jay" – to come up with the deposit injection. 

The banks were, of course, many of the same ones that had seen their deposits swell in the past week amid SVB's collapse. Ram Ahluwalia, the CEO of Lumida Wealth Management and a former Wall Street banker, told Insider that the JPMorgan-led rescue wasn't a purely altruistic move. For one, the move stabilized the banking system that houses the largest banks. Secondly, the First Republic infusion could grease the wheels for a potential, future acquisition — subject to regulatory approval, of course. 

"JPMorgan has a shot on goal to acquire First Republic," Ahluwalia said. First Republic has aggressively built out a non-agency, jumbo mortgage business in recent years, while JPMorgan boasts the largest mortgage securitization desk on Wall Street, he added. "That's what this is about."

While now being cast in the role of white knights, some of the largest banks benefited from SVB's distress and may have even initially sought to take advantage of it. 

San Francisco-based JPMorgan bankers began receiving inbound appeals from startup founders in the tech industry — urged on by their venture capital backers —  as early as Tuesday, according to one Chicago venture capital investor who heard it from founders in California.

In response, JPMorgan's sales pitch was simple. "It was less like, 'Hey we have some cool offerings,' and more like, 'We won't fail,'" the investor said.   

Silicon Valley Bank's HQ in Santa Clara, California
Getty Images

In other cases, the hunt for new business was more bold. There were the calls to Yoshida, couched in sober language of offering assistance. A senior JPMorgan banker called one tech founder on Thursday with a message: "What can we do to move you off SVB and over to JPMorgan?" according to someone familiar with the conversation. And bankers at SVB Securities received numerous calls on Thursday from JPMorgan and other large banks looking to hire them, said one person with knowledge of the calls. 

Large banks aren't allowed to purposefully take action to bring about the collapse of a bank, and at some point on Thursday or Friday, according to a person with knowledge of the matter, JPMorgan executives specifically warned their bankers against making such calls. 

On Friday, as SVB tipped into receivership, those calls stopped, said the person with knowledge of them. 

One big bank effort that has raised eyebrows and attracted attention is Goldman Sachs' work on behalf of SVB. 

The two banks had developed a strong working relationship over the years spurred by an admiration that Goldman's tech and private wealth bankers had for the smaller lender. 

Goldman would often refer clients to SVB, such as founders or startup employees who wanted a loan secured by their stakes in private companies, according to one person with knowledge of the relationship. 

Goldman even considered buying SVB at one point in 2020, though the talks fell apart over price, Semafor reported. 

So when SVB called Goldman in early March for help restructuring its balance sheet after ill-timed bets on long-dated Treasury securities, the tie-up made sense. 

The plan the two banks eventually hatched, for SVB to sell a portfolio of bonds at a loss and then raise the equity needed to replace capital, faced a time crunch. Moody's was threatening a ratings downgrade. 

If it had ended with that mandate, Goldman would have booked an underwriting fee and bought some SVB bonds at a discount, transactions it completes hundreds of times a year. 

Except that this time, it all went disastrously wrong.

Goldman cast a tight net looking for investors to buy SVB's equity, reaching out to General Atlantic and Warburg Pincus, but stopping short of trying numerous other private equity shops that may have participated in the deal, according to people familiar with the matter. 

For one, the bankers may not have realized the urgency of SVB's situation. Even General Atlantic didn't see the $500 million contingent commitment they eventually made to the deal as a distressed investment, a person familiar with the firm's thinking told Insider. For another, there wasn't much time to give investors access to nonpublic information. 

Ultimately, the bank came up short in finding investors who would buy the deal without more due diligence. 

A silhouette of a man walking in Goldman Sachs headquarters towards a screen that shows the bank's logo.
Goldman Sachs had a long relationship with SVB.
REUTERS/Andrew Kelly

That Wednesday evening, SVB announced a public plan to raise $2.25 billion, and said it had sold an almost $22 billion portfolio of bonds – later acknowledging that Goldman was the buyer. The disclosure ignited an almost 40% stock drop in after-hours trading and sparked the run on the bank that culminated in SVB's collapse. 

Even so, Goldman ended up doing well. In buying SVB's portfolio, the bank made $100 million by buying the securities at a discount, the New York Times reported. Including the cost of hedges and recent market moves, according to a person familiar with the transaction, the proceeds are likely to be closer to $50 million. The bank has sold some of the portfolio and expects to close out the position in coming weeks, the person said.  

The flight to safety that is benefiting the big banks will have a cost, however. Thanks to their sheer scale, large banks have been able to grab market share even as they offer more bureaucracy, lower deposit rates, and less hands-on service — especially for smaller clients. 

"Basic understanding of competition would suggest that consolidation gives the big banks more market power over consumers," Hilary J. Allen, a law professor at the American University Washington College of Law, told Insider.

Now, business owners and customers alike are left to contemplate a world with less access to flexible capital and competitive loan terms — provided the nation's biggest banks don't change how they do business. More than one person that Insider spoke to suggested that the largest banks aren't interested in catering to the early-stage startups that SVB courted. They're much more enamored with later-stage companies, those considered safer and more likely to need investment banking services, large-scale loans or treasury management. 

"If you think about the next new innovation, it might be harder for those companies to get banks to take them in," said Alexander Yokum, an equity research analyst at CFRA. "The last banks that did it...it didn't work out good for them." 

Ben Bergman contributed reporting.

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