First Republic Bank (NYSE: FRC) needs a rescue plan. They seem to be offering a rescue plan as well and it's most amusing. So amusing it gets close to laughable. All they need to find is someone to buy something and lose billions at the moment of buying it. One of those things that should be achievable by breakfast, right?
The base problem, as we've said before about First Republic, is that people worried about the safety and security of their money - their deposits - have been taking them out of the bank. This means that FRC must also shrink its lending. Because deposits are what finance the lending by a bank.
Banks keep two sets of books about their lending. Assets to be traded, which are priced to the market continually. Also, assets to be held to maturity - these are not marked to market. But, if that loan book to be held to maturity must be sold then any losses in it instantly crystalise. This is what happened to Silicon Valley Bank and wiped out their capital base. Further, in a world of rising interest rates those old loans on the books will have mark to market losses.
So, what can First Republic do? They must lower their assets, but to do so might wipe out their capital.
First Republic Bank stock price from NASDAQ
Well, here's what the suggestion is: “First Republic is said to have pitched a plan where the US government would pay above market value for bonds held by the bank, allowing it to raise money, according to CNBC.”So, someone else pays above market value for that loan book. But that's a problem - because the moment the loan book is sold it must be valued at mark to market prices. So, the actual suggestion is that First Republic should be saved by someone else taking the losses on the loan book, not First Republic shareholders. Which is interesting, we've got to admit it, it's also amusing to the point of being laughable. Why should someone else agree to take the loss, why not leave it with First Republic shareholders?
After all, we do have a system for dealing with banks that go bust. The Fed and the FDIC are rather good at it too, given how much practice they've had over the years.
Further, if this is the best that Firs Republic management can come up with perhaps it's no surprise the stock price continues to fall.
