Corruption, All but in Name

A little gem inside Jamie Dimon’s recent letter to shareholders was the fact that the bank now expects to make an additional $2b per year in revenue from its purchase of First Republic (numbers mostly validated by this morning’s earnings report). Back when the deal was announced, the expectation was it would only add $500m.

Great news for Jamie and his shareholders, not so great for you. If you live in America and pay taxes then you paid for some of those gains.

The FDIC lost approximately $13b after selling First Republic to JPM. It also agreed to share further losses on FRB’s loan portfolio and to give JPM a $50b loan to finance the purchase. Pretty good deal if you can get it (but you can’t, because you aren’t a big bank).

Dimon loves to play the part of the reluctant rescuer, and the financial media — who really should know better — loves to treat him like one. But it’s all an act.

JPM stock soared 2% the day the deal was announced. Why? Because the market realized what Jamie (and the small army of investment bankers who work for him) already knew: this was a good deal for them.

That made it a bad deal for the rest of us, almost by definition.

The FDIC could have charged them more so taxpayers lost less, but chose not to. That agency and the Fed employ many bank examiners whose job it is to value bank assets. So either they knew they were giving Jamie a sweetheart deal or were incompetent. There’s a long history of these so-called rescues being giveaways.

First Republic did a lot of things wrong, but one reason it failed was because it wasn’t too big to fail. Depositors kept transferring money to banks that were, like JPM.

This too is not an accident. For decades, the U.S. government has made it clear that the biggest banks have an implicit total deposit guarantee. Their safety acts like a black hole at the heart of the banking system, one that’s constantly exerting pressure on smaller banks.

The government has created an unbalanced banking system, and keeps tilting the scales further with every passing crisis. To be fair, it has levied additional insurance fees on the biggest banks to make up for last year’s losses. But a handout that has to be partially repaid is still a handout. JPM is still bigger and more profitable than it was a year ago, and that’s not an accident.

This is a form of corruption, all but in name. But I’m not sure we can even call it that since the system is designed to work this way. All the facts mentioned above are public and the only thing even the Jamie Dimon’s of the world could dispute are everyone’s motivations.

Indeed, the whole thing is so backwards that Dimon still acts like he did you a favor. Here are his exact words from the shareholder letter:

The purchase of First Republic Bank was not something that we would have done just for ourselves. But the regulators relied on us to step forward…and the purchase of First Republic helped stabilize and strengthen the U.S. financial system in a time of crisis.

You are welcome.

Dimon, as you know, hates Bitcoin. So does the FDIC. People in crypto act like this out of ignorance.

It’s not.