In the early 1980s, First Republic Chairman Jim Herbert, then running San Francisco Bancorp, wanted to get into a new line of business. The Bay Areas high earners were coming to him and asking for unusually large loans to buy pricey properties in the area. 

Why dont we do a couple of these and see how they go? Cant bankrupt the whole bank, Herbert said to the firms president, according to an account of the conversation on First Republics website.

Years later, after Herbert left San Francisco Bancorp and founded First Republic, his new bank became known for handing out interest-only mortgages at rock-bottom rates to borrowers with high incomes and exceptional credit scores. Typically, they didnt have to start repaying the principal for a decade. 

Demand for the loans surged during the pandemic as wealthy buyers sought mortgage deals that would allow them to keep the bulk of their money in higher return investments. The rush helped First Republic double its assets in four years. It also contributed to its collapse. 

In the early hours of Monday morning, JPMorgan Chase & Co. agreed to acquire First Republic from the Federal Deposit Insurance Corp., which seized the bank after a tumultuous period in which its stock had cratered and depositors had pulled almost half their money. Just a few weeks earlier, Wall Streets biggest banks had stepped in to shore it up with their own cash.

The deal marks the second-biggest bank failure ever in the US and the third this year alone, bringing Marchs banking crisis back into focus after a relative lull in the weeks since Silicon Valley Bank and Signature Bank went under.

This account is based on conversations with multiple people familiar with the last few weeks, all of whom asked not to be identified discussing private information. 

Rescue Plan

It wasnt supposed to play out this way. On March 16, as panic spread across regional banks in the US, 11 of the countrys biggest lenders banded together to inject $30 billion of deposits into First Republic for at least four months. The banks stock price had cratered in the week since SVB and Signature had collapsed, with investors concerned that First Republics large proportion of uninsured deposits could leave it vulnerable to the same fate. The cash dump was supposed to stabilize the bank, buying it enough time to find an acquirer and avoid being seized by regulators. 

First Republics M&A advisers quickly got to work trying to persuade those same banks to go all in on a full acquisition of the lender. Leading the charge was Peter Orszag, Lazard Ltd.s head of financial advisory and once a top economist to President Barack Obama. Hed been brought in alongside long-time advisers from JPMorgan in case a conflict arose if the latter decided to make a bid; the banks chief executive officer, Jamie Dimon, had helped orchestrate the deposit deal, after all. 

Dimon played down his role in the initial rescue deal on a conference call Monday, saying he was just the first phone call. He added that the system for keeping the advisory team separate from those considering a purchase had been very, very sound.

At the center of First Republics balance sheet was a $137 billion problem that made it a particularly hard sell: a giant book of those low-interest mortgages, mixed with some others, whose value had been severely dented since the Federal Reserve started raising interest rates.

At the start of the year, First Republic said its mortgages would be worth about $19 billion less than face value if sold off. It also had another $8 billion or so in markdowns on other loans as well as unrealized losses on bonds.

Potential bidders quickly realized that, in a sale, those $27 billion in unrealized losses would completely wipe out the firms $13 billion in tangible common equity. Analysts began speculating that even at $0 per share, no one would bite. Despite Orszags best efforts, First Republic seemed doomed to muddle along in a zombie-like state.

Days before First Republic was set to report first-quarter earnings, US regulators turned up the heat. They reached out to some industry leaders to encourage a renewed push to find a private solution and warned the lenders to prepare in case something happened soon, according to people with knowledge of the discussions. But the weekend passed without any news, and the banks held firm.

Then, earnings day came and everything changed. After several of its fellow regional lenders surprised investors with better-than-expected presentations, First Republics post-market update on April 24 confirmed their worst fears. Deposits had plunged by $70 billion almost half the banks total in a matter of weeks as customers yanked their money while the crisis was playing out. Its stock price, already down 87% this year, went into yet another freefall.

As the banks executives sped through a 12-minute conference call and refused to take questions, Orszag and his team still pitching hard were having a tough time persuading any of First Republics earlier saviors to step up a second time. The FDIC, advised by a Guggenheim Securities team led by former Treasury restructuring chief Jim Millstein, and mindful of how long it had taken to find a buyer for SVB, was already making plans for what would happen next. 

The advisers from Guggenheim faced their own challenges. Though they wanted to gauge interest in a potential receivership process, they couldnt provide much new financial information while the bank was still a going concern. Meanwhile, deposits were once again flying out of First Republic, and any leaks risked sparking a deeper run on the bank.

For its part, the Treasury Department, which would have been responsible for bringing the banking industry together in a second rescue plan, deferred to the smaller financial regulator throughout, the people said.

For the potential bidders, the reasoning was simple: Why make a deal now, they thought, when if they waited a few days they could probably buy the bank directly from the FDIC with better terms? That put them at an impasse with the agency, which was desperate to avoid the losses to its deposit insurance fund that would be inevitable if it seized the firm. For days, the game of cat-and-mouse played on.

Part of the problem was that any viable way to shore up First Republic that its advisers pitched, including buying just their underwater bonds at full value or taking an equity stake in the company, would only set the stage for a competitor to later get a sweeter deal for the entire bank. Meanwhile, First Republics wealth managers were jumping ship for rivals, damaging its most lucrative franchise. 

In the end, the FDIC blinked first, asking banks late last week to outline what theyd pay and, crucially, how much it would cost the agencys fund. Offers were due noon on Sunday, and by that afternoon the FDIC had fielded formal bids from four institutions: JPMorgan, Citizens Financial Group Inc., Fifth Third Bancorp and PNC Financial Services Group Inc. The agency ultimately went with JPMorgan because it pitched a so-called whole bank deal, vowing to assume all deposits. That meant the FDIC wouldnt need to use the systemic-risk exception to cover uninsured deposits.

Still, the agencys deliberations dragged late into the night, frustrating the giant teams that each bidder had put together to run the deals. 

JPMorgan now owns about $173 billion of First Republics loans, $30 billion of securities and $92 billion in deposits. It will share any losses on the firms single-family and commercial loans with the FDIC, and repay the deposits that the other banks put up in March.

This is actually a very good outcome for everyone, Dimon said Monday. This is how the system is meant to work.

Open Houses

For First Republics Herbert, the sale brings to an end the 40-odd years hed spent building the bank, from a single branch in San Franciscos financial district to 93 offices across the US with total assets of more than $200 billion. JPMorgan said Monday it wont keep the First Republic name, and will rebrand some of its existing wealth centers.

In the early days, Herbert trawled open houses across San Francisco, networking with brokers who could pitch the banks jumbo mortgages to their clients. Over the next couple of decades, First Republic weathered the savings and loan crisis of the mid-1980s, went public on the Nasdaq and expanded into wealth management and New York with the acquisition of Trainer Wortham, a storied investment firm with an office in Midtown Manhattan.

In 2007, months before the global financial crisis started to engulf the worlds banks, Merrill Lynch paid $1.8 billion to buy First Republic. The acquisition was a bet that the banks wealthy mortgage customers would move the bulk of their money into Merrill Lynch and pay for its brokerage services. Barely 18 months later, Bank of America swallowed Merrill Lynch and its First Republic subsidiary as Wall Street imploded around it. Less than a year after that, First Republic was back in Herberts hands as part of a management buyout backed by General Atlantic and Tom Barracks Colony Capital. 

There is nothing that cements a culture more than a successful challenge that the team overcomes as a group, Herbert said at the time.

In some ways, Sundays resolution was a win for the FDIC. Unlike the drawn-out, multi-week effort to shift SVB off its books, the deal was done and dusted in a weekend, just as the regulator prefers. But it leaves bigger questions for the banking industry at large; namely, can a private solution for a flailing bank, as the JPMorgan-led group attempted in mid-March, ever really work? As one senior executive at a bank that contributed money to the effort said: it certainly couldnt be done more than once.

This is another one-off solution to the liquidity crisis, James Fotheringham and Rufus Hone of BMO Capital Markets wrote in a note Monday. We worry the market will find another target for funding concerns.

Senior managers are discussing plans to eliminate about 3,000 jobs from the global workforce by the end of this quarter, according to people with knowledge of the matter. That would amount to roughly 5% of staff excluding financial advisers and personnel supporting them within the wealth management division.

The banking and trading group is expected to shoulder many of the reductions, one of the people said. A spokesperson for New York-based Morgan Stanley, which employs about 82,000 people, declined to comment. 

The cuts come just months after the firm trimmed about 2% of its workforce. Wall Streets biggest banks offered few reasons for cheer while reporting first-quarter results after seeing their fees from helping companies with takeovers and raising capital a proxy for the economys health slump over the past year. The Federal Reserves desire to curb inflation through rate hikes and the ensuing regional-banking tumult have further damped activity.

Chief Executive Officer James Gorman said last month underwriting and mergers activity has been subdued and that he doesnt expect a rebound before the second half of this year or 2024. Ken Jacobs, who runs Lazard Ltd., echoed the sentiments as he forecast that the industrys doldrums will last for the rest of the year.

Lazard will eliminate 10% of its workforce, the New York-based firm said last week. Jacobs noted that dealmaker pay has surged in recent years as junior bankers demanded higher salaries amid a boom. Its harder to roll back those raises, while costs for travel, entertainment and information services have soared as well, Jacobs said in an interview last week.

In the first quarter, Morgan Stanleys profit fell from a year earlier, dragged down by a dropoff in dealmaking, with a 32% decline in its merger advisory and 22% slump in its equity-underwriting business. Analysts are forecasting that revenue from banking fees will be in line with last years haul which was roughly half the $10.3 billion that the bank pulled in during 2021s dealmaking frenzy.

Job cuts across finance have returned since the pandemic, when banks held off on reductions to give employees stability and then fought for talent as deals picked up. But as that frenzy cooled, expenses have become the focus with several banks unveiling plans to fire staff.

Morgan Stanley in December cut roughly 1,600 jobs. Then Goldman Sachs Group Inc. eliminated about 3,200 positions in January in one of its biggest cuts ever. On Monday, Citigroup Inc. Chief Executive Officer Jane Fraser said her company is willing to make adjustments to staffing levels at its investment bank.

Like every institution, you make some adjustments around the capacity, but were playing the long game in investment banking, Fraser said in a Bloomberg Television interview.

Hiring in back-office functions such as human resources will be suspended or slowed, Krishna said in an interview. These non-customer-facing roles amount to roughly 26,000 workers, Krishna said. I could easily see 30% of that getting replaced by AI and automation over a five-year period.

That would mean roughly 7,800 jobs lost. Part of any reduction would include not replacing roles vacated by attrition, an IBM spokesperson said.

As artificial intelligence tools have captured the public imagination for their ability to automate customer service, write text and generate code, many observers have worried about their potential to disrupt the labor market. Krishnas plan marks one of the largest workforce strategies announced in response to the rapidly advancing technology.

More mundane tasks such as providing employment verification letters or moving employees between departments will likely be fully automated, Krishna said. Some HR functions, such as evaluating workforce composition and productivity, probably wont be replaced over the next decade, he added. 

IBM currently employs about 260,000 workers and continues to hire for software development and customer-facing roles. Finding talent is easier today than a year ago, Krishna said. The company announced job cuts earlier this year, which may amount to about 5,000 workers once completed. Still, Krishna said IBM has added to its workforce overall, bringing on about 7,000 people in the first quarter.

Krishna, who has been CEO since 2020, has worked to focus the century-old company around software and services such as hybrid cloud. He has divested lower-growth businesses like managed infrastructure unit Kyndryl Inc. and part of the Watson Health business. The company is currently considering selling its weather unit.

Armonk, New York-based IBM topped profit estimates in its most recent quarter due to expense management, including the earlier-announced job cuts. New productivity and efficiency steps are expected to drive $2 billion a year in savings by the end of 2024, Chief Financial Officer James Kavanaugh said on the day of earnings. 

Until late 2022, Krishna said he believed the US could avoid a recession. Now, he sees the potential for a shallow and short recession toward the end of this year. Though the companys strong software portfolio, including acquired unit Red Hat, should help it maintain steady growth despite worsening macroeconomic concerns, wrote Bloomberg Intelligences Anurag Rana last week.