First Republic Bank (NYSE: FRC) has now been parked with JP Morgan (NYSE: JPM) as a solution to the bank's problems. One major point is that the cumulatives and preferreds are not being picked up by JPM. They're therefore likely to expire valueless. The equity is currently doing better than perhaps should be expected. It seems likely - as the bank went into receivership prior to the sale to Morgan - that the equity will also become worthless. But perhaps there's some other part of the deal we're not being told as yet.
First Republic Bank stock from NASDAQ
The specific announcement of the receivership is here. There will be a loss to the FDIC insurance funds of perhaps $13 billion. That does, to us, suggest that the equity is going to go to zero. But as we say perhaps there's something else in the JP Morgan deal as yet unannounced. But the idea that they'd pay for that equity would be very strange.
But now that First Republic hsa been sorted out we get to the big question. Which is the next American bank that this is going to happen to? As Charlie Munger points out there are vast reservoirs of bad debt floating around the banking system. Not just that, the interest rate rises of recent months have left the hold to maturity books at many banks seriously underwater. They don't need to take the hit against their capital but only as long as the deposit base remains. If customers start fleeing the mid sized and regional banks - as happened to Silicon Valey and now First Republic - then they do have to liquidate those portfolios. At which point their capital gets wiped out. So, it's the run that matters. And who is going to be the next bank that customers worry about and therefore leave en masse?
It might not happen to anyone of course. But all the stock prices of those it might happen to are going to be very fragile for the next few months. For it would only take rumours to make the thing - the bank run - happen. We'd not recommend being long American regional banks at present.