‘JPMorgan can’t lose on the First Republic deal,’ tastytrade's Dylan Ratigan says
Host of “Truth or Skepticism” on tastytrade Dylan Ratigan and The Wall Street Journal Reporter Rachel Louise Ensign joins Yahoo Finance Live to discuss JPMorgan’s acquisition of First Republic Bank, the deal’s impact and benefits on the U.S. banking system, and the outlook for investors.
Video Transcript
JULIE HYMAN: Well, JPMorgan's buy-up of First Republic Bank after that company's failure marked the second largest bank collapse in US history was aimed not just at getting a good deal, but at capturing more of the wealthier client that First Republic thrived on. Joining us now for a look at the hidden benefits from JPMorgan's buy and also the effect overall on the banking system is Dylan Ratigan. He's host of "Truth or Skepticism" on tastytrade and, of course, a longtime financial news anchor as well, and Rachel Louise Ensign, reporter at "The Wall Street Journal."
And Rachel, I want to start with you. Because you wrote about this very issue for the "Journal." And it's funny because the reputation of JPMorgan might have thinking that, well, it's already good and dominant in everything. But this suggests that it wasn't and that this helps it add to that. So talk to us about what this deal does for the bank.
RACHEL LOUISE ENSIGN: So JPMorgan is very, very good at most things. And they do have a lot of very wealthy customers. But the business they're most dominant in is the very, very, very rich people, not just the somewhat rich people. And they compete with Bank of America, which has Merrill, you know, thousands and thousands of financial advisors, and also Morgan Stanley, which has a similar number of advisors. And they have never really been able to compete on the same level as those rivals. And what they are hoping is that this acquisition of First Republic will turbocharge their ability to serve those merely rich people.
BRAD SMITH: So, then, at what point did we start to see this trickle through to the financials of JPMorgan? What does success look like for them with getting parts of First Republic assets?
RACHEL LOUISE ENSIGN: I think success looks like keeping those customers. First Republic had a very specific business model. And people stayed there because they loved their First Republic banker and the personalized service that they got. And it remains to be seen if JPMorgan, which has a different model and will be getting rid of the First Republic name, clearly going to be changing a lot of the way that they do business, will keep those customers.
JULIE HYMAN: And Dylan, I know you like-- you think a lot about the bigger picture here and what this is going to mean for the banks that JP Morgan is getting more dominant, potentially, in another area. How should we be reading this?
DYLAN RATIGAN: Yeah, I mean, I think that, you know, you have the rules as they're written on paper and as we pretend that they are with the legislation and the whatnot. And then you have actual reality. And so the rules as they're written on paper are no bank should have more than 10% of the assets, that insurance on deposits is capped at $280,000, all these rules.
What's been made very clear-- going back now to 2008 and we saw it in the pandemic, we're seeing it this year with the bank failures-- is the actual rule is whatever unlimited amount of money that the government wants to provide at the time-- and in JPMorgan's case and then in the big banks' case, JPMorgan can't lose on the First Republic deal. It's similar to when JPMorgan purchased Bear Stearns. All of the risk resides with the taxpayer, basically, or with the insurer-- really, with the FDIC, which I suppose it's one step away from the taxpayer because of the fees that are paid.
And JPMorgan just ends up with a creative deal immediately. I mean, if I give you First Republic Bank and you don't have to buy it and I absorb the risk for it, it's inherently good for you. The question is, how long are we going to pretend that we-- we function as if we have a nationalized banking system, I guess is my point. And, yet, we pretend that it's a private sector risk management. But it's not.
Because there's no-- the consequences for bad management are entirely borne by the small banks. The large banks have no liability because they're a special class. And then they have been empowered as a special class to even get waivers on the rules to get bigger.
The real question is, why are they withdrawing credit when there's an unlimited supply of funds being provided to them implicitly by the government? And so what I really am more curious about is the premise of credit contraction because of the banking crisis when the banking crisis is really a fabrication. Because at the end of the day, the same way the Swiss are going to fund UBS to buy Credit Suisse, the Federal Reserve and the government is going to ultimately make sure that JPMorgan and Bank of America and the big banks have custody of whatever financial assets.
BRAD SMITH: Certainly. So Rachel, all this in regard, what does this mean for some of the smaller banks, the regional banks that were looking to get bigger as part of the bidding into these talks as well after the FDIC had receivership of the First Republic assets? You had banks like PNC who were reportedly in talks looking to get bigger on this too.
RACHEL LOUISE: Right, well, we've reported that there were three large regional banks that did bid and were in pretty advanced talks with the FDIC for the First Republic deposits and assets, including PNC. But at the end of the day, they say that they have to go with the offer that presents the least risk or the least cost to the deposit insurance fund. And JPMorgan is just so large that they were able to use their balance sheet to make an offer that none of these smaller banks could compete with.
DYLAN RATIGAN: And, Rachel, that literally-- nothing sums up the whole situation better than the primacy of size, which then begets guaranteed authority over the market.
JULIE HYMAN: I mean, I guess, Dylan, then my question is, what are the ultimate implications of this? If you're an investor, I mean, you've got to think--
DYLAN RATIGAN: You want to own the big banks. I mean--
JULIE HYMAN: Right, I mean, right?
DYLAN RATIGAN: --you set aside your morality. I mean, at the end of the day, you want to own the large financial institutions that are sponsored by the US government. And then if you want to have a discussion about what your opinion of that fact, you know, do that on Sunday. But don't do that when the market is open.
BRAD SMITH: Dylan Ratigan, host of "Truth or Skepticism" on tastytrade and Rachel Louise Ensign who is the reporter at "The Wall Street Journal." Thank you both for joining us here, really insightful conversation this morning.
