First Republic’s collapse was sparked by ‘jumbo mortgages’ with interest-only loans at rock bottom rates for the wealthy such as Goldman Sachs’ COO and a music exec – who could wait a DECADE before paying back millions
- The failed bank sold mortgages with rock bottom rates to rich clients whose loans were interest only for up to a decade
- Property records show the president of Goldman Sachs and a music executive recently bought multi-million dollar New York City homes with the deals
- But the ‘jumbo mortgages’, a staple of First Republic’s business model for years, also contributed to the bank’s collapse
First Republic Bank’s collapse was part-triggered by its offer of attractive ‘jumbo mortgages’ to wealthy clients whose loans were interest-only for up to a decade.
The failed bank sold loans with rock bottom rates to rich clients including Goldman Sachs President John Waldron and music mogul Todd Moscowitz, the former CEO of Warner Bros Records, who both purchased multimillion dollar New York City homes, property records show.
These ‘jumbo mortgages’, a staple of First Republic’s business model for decades, were a great deal for buyers – but became a huge burden for the bank when the Federal Reserve began to aggressively hike interest rates in 2022.
First Republic was essentially sitting on huge losses as it clawed back a measly rate from mortgages worth around $137 billion, while the value of the debt plummeted.
The same market forces contributed to the collapse of Silicon Valley Bank, whose bet on low-interest, long-term bonds backfired when the Fed hiked rates and the value of their investments tumbled.
First Republic Bank was taken over by regulators and will be acquired by JPMorgan Chase after its collapse, which was partly caused by its offer of ‘jumbo mortgages’ to wealthy clients
Property records in New York City reveal wealthy figures who’ve recently taken advantage of First Republic’s interest only mortgages include Todd Moscowitz, former CEO of Warner Bros Records
John E Waldron, president and chief operating officer of Goldman Sachs, took out an $11.2m mortgage with First Republic for a New York City apartment. The loans were a great deal for customers but turned into a nightmare for the bank, which lost billions on the low-rate deals
Property records in New York City reveal Goldman Sachs President John Waldron took out a $11.2 million mortgage from First Republic on a condo unit in the luxury 15 Central Park West building.
Waldron purchased the unit in June 2020, when the Fed’s interest rate was just 0.08%. The rate of Waldron’s mortgage is unclear, but it reportedly had a ten year interest-only period.
In June 2022, music executive Todd Moscowitz snapped up a penthouse in the trendy Manhattan neighborhood of Tribeca with a First Republic mortgage of around $8 million. His loan also had a ten year interest only period.
A Bloomberg analysis found these mortgages were also snapped up by other financial bosses, tech executives and a gallery owner to purchase property in New York City.
First Republic handed out interest only mortgages worth $20 billion in San Francisco, New York and LA alone in 2020 and 2021, the analysis found. Customers actually stood to make money as the value of their properties increased by more than their payments.
The bank was happy to dish out the loans because the borrowers were wealthy and had good credit scores. It was the low interest rates that became a problem.
The value of the loans depleted as Federal Reserve interest rates increased and by the beginning of 2023, First Republic estimated its mortgage collection was worth $19 billion less than their original value.
In June 2022, music executive Todd Moscowitz snapped up a penthouse in the trendy Manhattan neighborhood of Tribeca with a First Republic mortgage of around $8 million
Property records in New York City reveal Goldman Sachs President John Waldron took out a $11.2 million mortgage from First Republic on a condo unit in the 15 Central Park West building
Regulators announced on Monday morning that they had seized First Republic and the bank would be taken over by JPMorgan.
The collapse came after months of turmoil in the wake of SVB’s collapse. Last week, First Republic’s share price was decimated after it revealed it lost $100 billion in deposits in the first quarter of 2023.
First Republic’s collapse also came despite a $30 billion funding injection from 11 larger banks in March to try and stabilize the sector.
The bank’s stock closed at $3.51 on Friday, a fraction of the roughly $170 a share it traded for a year ago. It fell further in after-hours trading.
First Republic still opened as usual on May 1, with clients continuing to receive uninterrupted service, but it will be rebranded by JPMorgan.
JPMorgan has taken on approximately $173 billion of loans and $30 billion of securities, as well as $92 billion of deposits, including $30 billion of large bank deposits.
First Republic Bank has been sold to JPMorgan Chase after regulators seized it on Monday. Pictured: First Republic Bank headquarters is seen on March 16, 2023 in San Francisco
The bank’s stock closed at $3.51 on Friday, a fraction of the roughly $150 a share it traded for just three months ago year ago. It fell further in after-hours trading
Jamie Dimon, chief executive officer of JPMorgan Chase & Co, who said of the purchase of First Republic: ‘Our government invited us and others to step up, and we did’
President Joe Biden said on Monday that ‘taxpayers are not on the hook’ following the First Republic collapse.
‘These actions are going to make sure that the banking system is safe and sound,’ Biden said of the JPMorgan rescue.
First Republic’s 84 branches opened on Monday as branches of JPMorgan Chase.
Before this year, First Republic was the envy of the banking industry. Its well-appointed branches served warm cookies to its clients — who were almost exclusively the rich and powerful.
Its bankers lured in wealthy clients with low-cost mortgages and attractive savings rates in order to sell them on higher profit businesses like wealth management and brokerage accounts.
In return, the wealthy rarely defaulted on their loans and parked substantial sums of money in the bank that could be lent elsewhere.
But that business model of catering to the rich became a liability with the collapses of Silicon Valley Bank and Signature Bank.
These banks had large amount of uninsured deposits — that is, deposits above the $250,000 limit set by the FDIC. As was the case with Silicon Valley Bank and Signature Bank, First Republic clients with large accounts were quick to pull their money at the first sign of trouble.
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