Asleep At The Wheel?

Brit Ryle

Posted May 1, 2023

With the fire sale purchase of First Republic Bank, JP Morgan’s (NYSE: JPM) CEO Jamie Dimon told the world that “This part of the crisis is over…The American banking system is extraordinarily sound.”

Well. I know I feel better. Don’t you?

Of course Dimon’s “all clear” statement is all about sentiment. “Trust” and “faith” and “confidence” are the bedrock for any individual bank or banking system. 

Depositors have to feel confident that their money is safe, that the bank’s lending standards are robust enough to ensure that loans will be repaid. And that the banks “cash equivalent” holdings – ie U.S. Treasury bonds – are sufficient to cover expenses and withdrawals. 

The problem is that accounting standards tilt the playing field in any banks’ favor. Because banks are allowed to report their asset value at the price they paid for those assets, not at what price those assets could be sold for right away – today. 

This means that bank management can operate under a false sense of security. Because a bank’s financial health can look solid on paper. But if you have to turn balance sheet paper into the kind of paper depositors want when they start pulling their funds out, well, that’s a different matter. 

And for depositors, the gray area between what a bank says its worth and what it’s actually worth on any given day is what fires the imagination. It’s pretty well documented that the bank run that crushed Silicon Valley Bank started in the rumor mill. And it seems pretty clear that the same rumor mill dynamic took down First Republic Bank – it lost half its deposit base, $100 billion dollars, in about a month. 

So if the crisis really is over, JP Morgan will make out like a bandit. Because Dimon’s First Republic maneuver will add $92 billion in deposits and $173 billion in loans to JP Morgan’s balance sheet. Plus, it will get favorable terms from the FDIC to borrow $50 billion for 5 years. 

Yep, America’s biggest bank just got bigger. And as near as I can tell, the cost to JP Morgan will be an immediate $10 billion payment to the FDIC. There’s also the matter of the $30 billion loan that JP Morgan, Bank of America, Citigroup and 8 other big banks made to First Republic in mid-March. 

Of course JP Morgan’s on the hook for this loan, but I bet those banks will accept equity instead of cash, meaning that the cost will be offloaded onto JP Morgan shareholders.  

JP Morgan will gain an estimated $500 million in annual net income right away. 

Not bad. 

JP Morgan shares are up around 2.5% as I write. And that tells us all we really need to know: this is a good deal for JP Morgan. 

Dimon: “…nothing like 2008, 2009 for a lot of different reasons.”

See, this is where I wish Dimon had just stopped talking. 

As a parent, I never had to think about it: I knew on an instinctive level that after finishing a bedtime story to my kids, it was a bad idea to kiss them goodnight and say “Don’t worry, there isn’t a monster in your closet.”

Likewise, there’s really no need to bring the 2008-2009 monster into it at all. Just say the immediate crisis is over and leave it at that. 

I remember the Great Financial Crisis pretty well.

I remember Cramer pounding the table that Bear Stearns was a strong buy at $120, a week before it went bankrupt. I remember when Treasury Secretary Hank Paulson on Meet the Press in the summer of 2008 said “this is a very manageable situation.” And I remember Fed Chair Bernanke saying “The Federal Reserve is not currently forecasting a recession” in early 2008. 

Again I understand the pivotal role that sentiment plays. And I don’t blame the Jamie Dimon’s of the world for trying to instill confidence in the “system.” I mean, as CEO of America’s biggest bank, that really is part of his job. 

One of the big and underappreciated reasons that the 2008-2009 crisis turned into a panic was the unwavering insistence by the “experts” that everything was fine, when everyday Americans could readily see that everything was definitely not fine. 

It’s hard to have confidence that the train will stay on the tracks when the conductor is clearly asleep at the wheel.

Briton Ryle
Chief Investment Strategist
Pro Trader Today