When J.P. Morgan moves into bail out mode, consider being a buyer too

Jump forward a hundred years and once again a banking crisis is brewing up. Loose lending practices, stuttering economies and falling house prices combined to create the Global Financial Crisis of 2008. This time it was investment bank Bear Stearns that was facing a liquidity crunch that was threatening its solvency and overall confidence in the banking system. Finally, after weeks of mounting speculation, the Federal government decided that it was time to restore confidence and over one weekend in March of 2008, they agreed a deal for JP Morgan Chase, as it was now known, to acquire all Bear Stearns shares, assets and liabilities[7]. This time the CEO for JP Morgan Chase was Jamie Dimon who had taken over that role in 2005 but like Jupiter Morgan he knew a great opportunity for a canny operator with access to capital when he saw it.

So back to where we started, Jamie’s annual letter to shareholders. This is a lengthy missive, and it touches on multiple topics. In one section, Jamie advises world leaders on how best to resolve the disputes in Ukraine and the Middle East. He thinks that there is a much lower chance of a soft landing than the market appears to be expecting and, consequently is preparing for a very broad range of interest rates from 2% to 8% or more. He talks a fair bit about Artificial Intelligence, I think that is mandatory.

But it was his recap of last year’s First Republic acquisition that most caught my eye. Yet again JP Morgan had been called upon by administrators to be part of a bank bailout. This time it was the US Regional Banking crisis of 2023. Silicon Valley Bank and Signature Bank had both collapsed after they were unable to cope with run-on funds, they both failed within 48 hours of each other, and a proper panic had set in[8].

The next domino to topple was First Republic which had a similar business model to Silicon Valley Bank, lending to the exciting Silicon Valley tech start-ups and their often super-wealthy founders. This is in theory a great business model, but it had what turned out to contain some potential time bombs. It made for a highly concentrated client base by demographic and geography and in the current situation a bank that had held deposits of over US$250k for clients was vulnerable. The reason for this was that the regulator covered customers for up to $250k in the incidence that their bank failed[9]. If you’re super wealthy like a lot of First Republic customers, this might only be a small percentage of what you have on deposit in the event of a collapse. So, you understandably want out but unfortunately, this creates a doom loop as the majority of other customers also want out at the same time. So almost inevitably First Republic failed, the biggest bank collapse by far since 2008, with the regulator taking control of the bank to provide stability for its customers[10]. And if you did not already know, I’m sure you can guess who bought First Republic as a going concern from the regulator.

When JP Morgan acquired First Republic it paid the regulator US$10.6 billion. At the time Jamie Dimon advised his shareholders that they expected First Republic to generate annual earnings of US$500 million a year. Not on the face of it a real bargain, without growth that’s essentially a 20-year payback profile. But at least it did not create any public backlash, Jamie may have been mindful of the outcry that had greeted their purchase price of Bear Stearns back in 2008[11]. 

In his latest letter to shareholders, Jamie was able to update that the First Republic business looked likely to deliver annual earnings of closer to US$2 billion under its JP Morgan ownership. Now we are in bargain territory, without any further growth that’s close to a five-year payback. The JP Morgan tradition of triumphing in adversity has logged yet another chapter in its ever-growing legacy. And investors have yet another reminder of the value of ready capital and a stern stomach in a crisis.

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