When Janet phoned Jamie for the latest US bank rescue

Mr. Dimon, the chief executive officer of JPMorgan Chase, an advisor to First Republic, has enlisted his bankers to gather support. As of Wednesday morning, the country’s other three largest lenders, Bank of America, Wells Fargo and Citigroup, were on board.

More video and phone calls followed, including a call involving nearly a dozen CEOs, Ms. Yellen and top banking regulators. While JPMorgan’s bankers made the initial outreach, most of the interviews were executive-to-executive.

Mr. Dimon and Ms. Yellen then met in person at their Washington office to discuss the details before a group of 11 banks announced on Thursday (Friday AEDT) that they had agreed to invest $30 billion in the to pay in distressed lenders.

Those who attended or were briefed on the talks insisted regulators were not waving their arms or making specific promises to get banks on board.

Deposits earn interest at the market rate and are too large to be covered by the Federal Deposit Insurance Corporation. That means banks would risk losing the money if First Republic failed, unless federal regulators declare it systemically important, as in the case of SVB.

“Officials were supportive and wanted it to work, but . . . we’re not getting anything special,” said an industry official briefed on the talks. “We didn’t get a wink or a nod.”

“But the government was well aware of this [plan] was created outside of government. It would have been spoiled by the government’s involvement,” said one person who attended the discussions.

Most banks quickly jumped in. “Stability and resilience of the broader financial system is pretty high on our list of priorities. We thought that was the right thing to do,” said a person familiar with the discussions at one of the institutions involved.

Historical Precedents

Banks’ contributions were largely tied to the size of their deposit bases, with the big four lenders contributing $5 billion each and BNY Mellon, PNC, State Street, Truist and the US Bank all contributing $1 billion.

Morgan Stanley and Goldman Sachs, which as investment banks have relatively small deposit bases, were among the latest to join but each raised $2.5 billion to show their support, two people said.

Participants were heartened by the news that First Republic’s deposit outflows had slowed. While it seemed like the bank could survive without help, “you can’t take that risk,” one of the people said.

Janet Yellen met with Jamie Dimon to discuss the details before the deal was announced. Bloomberg

There is historical precedent for collaborative industry solutions being brokered or heavily encouraged by government. In 1907, when panicked stock market crashes were destabilizing banks and brokers, financier John Pierpont Morgan called together the biggest financiers of his day, literally locked them all in one room, and forced them to devise a rescue plan.

He was able to do this because the federal government raised more than $25 million in deposits to prop up the banks.

Similarly, when hedge fund Long-Term Capital Management collapsed in 1998, the Federal Reserve assembled a $3.6 billion bailout fund from contributions from its major Wall Street creditors.

The industry-led solution for First Republic was praised by Patrick McHenry, Republican Chair of the House Financial Services Committee: “This is how our free market should work. In a time of uncertainty, bank managers and regulators need to focus on risk control to strengthen the stability and resilience of our financial system.”

Tina Smith, a Democratic senator who sits on the Senate Banking Committee, welcomed the solution brokered by the Biden administration. “It’s important to me that we don’t have taxpayers’ money to bail out the bad decisions,” she told the FT at those banks.

The turbulence is not as bad as the financial crisis, “you want to prevent the flood, but when you’re in the middle of the flood, you have to do everything to stabilize the situation.”

Additional reporting by Stephen Gandel in New York

Read more about the collapse of the Silicon Valley bank

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