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00:00Chris, when you read lines like can you mentioned a moment ago that JP Morgan and the FDIC have agreed to share the burden of losses. What does that actually mean in practice? Can you explain that for our audience? Sure. So as JPM now has the assets and deposits, they will work through those and particularly loans as they collect those loans will be a loss share agreement for any losses that come out and then that will be shared with the FDIC. It's very similar to what we had in 2008, nine and 10. Typically the assets back then were much worse. These are assets that are simply marked for interest rate risk, not for credit risk. So ultimately, I think you'll see JP Morgan sit with these assets and sell them and move forward. It's possible that much of what they are holding here comes back to them in the next 12 to 18 months. If interest rates change and the Fed changes policy perhaps a quarter or two from now, that's going to have a sea change to how these assets are valued. So timing is everything. And I think that's ultimately why the bid end up being less of a discount for JP Morgan than the other banks do. They share the upside as well. Then, Chris, they capture most of the upside. So I think the upside all goes to JP Morgan. That's fascinating premise. Well, especially because in the stories it actually said they shared the upside as well as the downside. So it's confusing that basically JP Morgan ends up with the entirety of the upside at a time where the FDIC wants to mitigate socializing losses and privatizing the gains. And Chris, can you give us a little bit more clarity on that? What are you reading at the moment? It gives you a better idea of what's going to happen there. Well, I think the loss share agreements can be very typical in what we saw back in the transactions in 2008, 9 and 10. It was a very typical loss share arrangement where the FDIC seized the bank. They cut a loss for arrangement under the bank, collected the assets. The bank becomes the conduit for the FDIC to collect the money they collect for warrants. It's less of an issue with deposits. It's much more with the loans that were made. Remember, the loans the first republic had were largely low rate mortgages with low loan to value. So these are not risky loans that in many cases these are very low risk loans. They simply had interest rate risk because they were done at three and a quarter, three and a half. And the mortgage market today is closer to 6. And Chris, as you know and as we know, because we've talked about this over the last couple of weeks in a much bigger way. JP Morgan already had more than 10 percent of U.S. deposits. Now that's been seen as problematic for the regulator. We assume this morning that that exception has been granted already just by the very nature of this being authorized at the moment. Correct. So can I ask the question then? Does this become a problem if they held more than 10 percent of U.S. deposits? I assume that was a line in the sand for a reason. Why are we willing to go beyond it? Well, I think at the end of the day, if you had to take a lower a lower bid and therefore a bigger loss for the FDIC and for the deposit insurance fund, it would have been problematic for the other banks. Other banks would have had to pay more than they already are paying. The cost of the FDIC insurance will go higher in the coming quarters and next year. So if you could limit the hit to the DIFto the deposit insurance fund, that really is the best outcome for both the banks and for the system. So ultimately, this is about building confidence. And I think you build confidence A, by having first republic resolved and B, by seeing that a very good operator who has strong capital. Remember the fortress balance sheet? JP Morgan has always advocated that allows them to do the transaction. I think it's going to be rare. I don't think we're gonna see others like this. It really was the bank that was caught by friendly fire. six weeks ago.

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What the First Republic Acquisition Means for JPMorgan

Chris Marinac, director of research at Janney Montgomery Scott, examines JPMorgan Chase & Co.’s acquisition of First Republic Bank on “Bloomberg Surveillance.” (Source: Bloomberg)

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