‘The failure of First Republic was inevitable,’ William Cohan says

Pucknews Founding Partner William D. Cohan joins Yahoo Finance Live to discuss JPMorgan’s buyout of First Republic Bank, what led to the collapse of First Republic Bank, how to prevent another banking crisis, and the outlook for the banking sector.

Video transcript

DIANE KING HALL: Continuing our coverage of today's top headline. The buyout of First Republic Bank by JPMorgan Chase is set to make the biggest bank bigger, even as banking continues to undergo a confidence crisis spurred by higher interest rates. Joining us now to chat about how we got here and what can be done to stop the collapses,

William Cohan, founder-- founding partner, rather, of Pucknews. Bill, thanks so much for joining us. Let's get right into this. What is your takeaway from what's occurred from yesterday through today, first up?

WILLIAM COHAN: Makes absolutely perfect sense. The government, the Feds had no choice. Frankly, JPMorgan Chase is the best buyer of all of these assets with the big assist from the Fed.

And Jamie Dimon is absolutely right, there's always going to be bank failures. It's the way the system is designed. We collectively as a society have decided we can kind of put up with it every 10 or 15 years as long as it doesn't bring down the whole economy. And this little-- it's hardly little, but the failure of these two large banks in the last two months has been largely contained, I believe. And, you know, it's an acceptable risk that, unfortunately, we have to agree, collectively, we're going to assume.

BRAD SMITH: Hey, Bill, Brad here. Is there any significance around the timing of this deal because this comes after First Republic had reported earnings where they disclosed that they were down, what, 41% in terms of the deposits declining 41% during the first quarter, which was really mired towards the end of the quarter by the end of-- or at least that final couple of weeks in March because of the collapses of Silicon Valley Bank and then Signature Bank. And First Republic getting pulled into that, as well.

WILLIAM COHAN: Brad, the failure of First Republic was inevitable after, you know, Silicon Valley Bank failed and Signature failed. It's another, what I call niche bank. You know, it caters to a very specific clientele. It made a series of rather questionable risk management decisions, as did Silicon Valley Bank, as did Signature.

Now, these banks are failing for a reason-- a combination of major loss of confidence, which of course, is the end of any bank. And two, bad risk management decisions on the part of the bank management. When you make big mortgages, jumbo mortgages at below-market interest rates as your business plan, it's great for your borrowers. My goodness, no wonder they're so popular.

They probably had borrowers who loved them. But it's very bad risk management, especially in an environment when you just know that interest rates are on the way up, after 13 years of the Fed manipulating interest rates down. So bank management is a major reason for these failures, as well.

DIANE KING HALL: So Bill, Jamie Dimon said on the call they had today that they didn't ask to be-- the government asked JPMorgan Chase to come to the table. But JPMorgan Chase is the nation's biggest bank and now they're even bigger. Talk to us about the optics of this and the potential fallout from that.

WILLIAM COHAN: You know, I'm sure there'll be criticism of JPMorgan Chase getting-- continuing to get bigger from the progressive wing of the political spectrum. But-- and, of course, the Fed had to approve this because, you know, they're gonna exceed the 10% deposit limits.

But again, they're the best buyer. They're the best-run bank. They're our biggest bank. You know, and as was just pointed out, I mean, we have something like 4,500 banks in this country. Other countries have national champions, many, many fewer banks. We have more banks probably than any country in the world.

And that number is obviously going down and consolidation will continue. But you have to remember, after 2008, basically, the Fed would not allow the big Wall Street banks, the SIFI banks, the systemically important financial institutions, to do M&A deals. I mean, Goldman Sachs should be doing deals left and right but the Fed won't let it.

And JPMorgan Chase has been doing small sort of fintech deals but has not been allowed to buy a big bank, anything like what happened today with First Republic. And they had to get a waiver. And you know, this-- Jamie Dimon is right. I mean, when you're the best-run bank, the Feds are gonna come looking to you to, you know, dig itself out of a crisis.

BRAD SMITH: And so because the Feds gave JPMorgan, gave Jamie Dimon that call, as a result of this deal, is the competitive landscape in the financial services industry and especially for the assets that now JPMorgan is able to take on, does the competitive landscape become better or worse for end consumers and customers of the banks?

WILLIAM COHAN: You know, I-- there's still so much competition, Brad. I-- you know-- you know, incrementally, on the margins does this take some of the, you know, competitor out of the market. Don't forget, First Citizens-- or Citizens Bank got Silicon Valley Bank. You know, these are niche banks, if you will, as I like to say.

This is not nearly the magnitude of the change in the competitive landscape that happened after 2008 when both Bear Stearns, Lehman Brothers, and Merrill Lynch got taken out of the competitive landscape. This is totally on the margins. I don't think consumers will be affected one way or another.

You know, [CHUCKLES] already, JPMorgan Chase-- I'm a JPMorgan Chase customer-- they basically pay nothing for your checking and your savings deposits. I don't think you can get any closer to 0 than they already are. So I don't-- I don't think that's going to change one bit. And, you know, think of all those uninsured deposits that are now feeling pretty great right now, knowing that JPMorgan Chase stands behind them.

So you know, this was the inevitable outcome. This was a win. It's kind of a major blip. We won't even remember this in 10 years.

DIANE KING HALL: OK, Bill, one more quick question for you. You talked about the numbers that Ines mentioned in her reporting, about the number of banks still. Though, it's down from the levels we saw during the Great Recession, the financial crisis back in-- between '07-'09. Is there a need, from your view, for further consolidation within the banking sector?

WILLIAM COHAN: I mean, if the Fed will allow it, absolutely. It has allowed some smaller regional banks to combine. That's how I think we got Truist, one of my favorite banking names of all time. So absolutely. I mean, there's just too much-- too many banks. And there will continue to be consolidation. But you know, it's gonna be the Fed is gonna be the one to decide whether that can happen, not really the marketplace.

BRAD SMITH: Bill, Cohan, founding partner of Pucknews. Bill, always a pleasure to get some of your insights and thanks for the context around this.

WILLIAM COHAN: Thank you.