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First Republic Bank Fails As Former Treasury Secretary Larry Summers Warns The Consequences To Come

The failed bank was taken over by the FDIC and taken over by JPMorgan Chase A Month After Received A $30 billion deposit

First Republic Bank became the fourth failed bank on Monday as the FDIC took over the failed bank that closed and sold it to JPMorgan Chase.

The decision upon the taken over by the FDIC was that Federal Republic Bank had deteriorated. Government regulators saw no time to pursue a rescue through the private sector.

Marquee at the main entrance to the JPMorgan Chase Headquarters Building in Manhattan. The banking giant bought First Republic Bank as the San Francisco-based bank was taken over by the FDIC. ERIK MCGREGOR/BENZINGA

“I’m surprised and disappointed that this situation has continued to linger as long as it has, with the bank stock down 95% and various other credit indicators of it in a problematic direction,” said Larry Summers, former Secretary of Treasury under Bill Clinton, in an interview with Bloomberg.

The big banks and the government both have a strong stake in the situation being contained and resolved, the economist said, noting that the big banks have deposits in First Republic in significant quantity. When problems at First Republic initially began to surface in mid-March, the government brokered a deal, paving the way for the bank to receive $30 billion in uninsured deposits from 11 banks that included JPMorgan Chase & Co., Inc.

The shares were declining as its last price closed at $3.51 for Federal Republic Bank. This is the second bank that JPMorgan Chase had purchased since Washington Mutual fell in 2008.

First Republic’s stock went into a free fall on Friday amid rumors the Federal Deposit Insurance Corporation (FDIC) would take over the bank and a Wall Street Journal report that said that, following the FDIC takeover, JPMorgan and PNC Financial Services Group Inc. would bid for the beleaguered bank.

“I hope that between the banks, the FDIC, the other public authorities, that the best way forward will be found within the next week or 10 days,” Summers said, according to Bloomberg.

Among the data released last week, the first quarter employment cost index was most noteworthy as the labor market has been the key to the process of inflation, Summers said.

“It only comes quarterly, because it’s the best of the numbers for measuring wage inflation because it includes benefits and adjusts for changes in the composition of the labor force,” the economist said.

“The 4.8% of labor cost inflation just does not go with 2 percent underlying inflation. So I think we’ve got a bit of a stagflationary problem developing where we have a base inflation that’s well above target,” Summers said.

The former Treasury official also reiterated his view that inflation wouldn’t return to the target without a meaningful slowdown in the economy.

“If the Fed does what’s necessary to contain inflation, I think a slowdown is likely to come along,” Summers said. The odds of that happening in the next 12 months are pretty good, perhaps 70%, he added.

Summers said the Fed should raise rates in May due to emerging credit problems but noted that June is an “open question.” “So what I hope we’ll see from the Fed is a move upwards by 25 basis points in May, followed by a commitment to monitoring both the activity and inflation figures on one hand, and the credit flow issues,”  he said.

Produced in association with Benzinga

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