First Republic Bank crisis plunges Biden team back into no-win political dilemma

CNN
 — 

A new joint effort by the government and the finance industry to prevent another teetering bank from triggering a wider crisis is underscoring US and international worries about the sector and producing another no-win political headache for the Biden administration.

Regulators rushed over the weekend to auction off the troubled regional bank First Republic, which was hit by massive withdrawals despite a previous industry cash injection to try to shore it up.

The hurried effort to prevent First Republic sowing further turmoil in the banking sector followed a previous Federal Deposit Insurance Corporation mobilization to contain the failures of two other similar sized banks, Silicon Valley Bank and Signature Bank, in March.

The independent agency’s new forced intervention – even if it succeeds in limiting the fallout of First Republic’s troubles – is likely to fuel concerns about the overall health of the US banking sector. The run of banking crises has been partly caused by damage to banks – which had profited from years of low interest rates – from the Federal Reserve’s quick rate hikes to fight high inflation.

Challenges to the economy are already causing political reverberations for President Joe Biden, who launched his reelection bid last week arguing that he had engineered a strong exit from the Covid-19 storm for the economy, notwithstanding high inflation that caused significant pain for American families last year. Inflation has not yet fallen to low levels typical of recent decades, which has fueled an era of price stability.

The pain in the regional banking industry comes amid growing anxiety about a separate challenge to the sector posed by tens of billions of dollars in commercial real estate loans held on buildings whose values have tumbled following a slow return to offices in many cities and a reshaped work culture after the pandemic.

A surprisingly resilient economy has resisted an expected tumble into a recession for many months at a time of near historic low levels of unemployment. But the new banking drama will add to worries about the near-term future that were stirred by a slowing of economic growth to an annualized and seasonally adjusted rate of 1.1% in the first quarter of the year, according to official data published last week.

The new concerns over the banking sector put the administration back in an unappealing position. During the previous round of banking disruption earlier this spring, administration officials strenuously denied that their interventions – designed to protect depositors rather than industry executives who made rash decisions – amounted to a bailout.

This position was a recognition of the political hangover left by massive government-funded rescues of the sector during the 2008 financial crisis, which helped nurture the Tea Party movement in the Republican Party and angered Americans amid a sudden escalation of unemployment.

But the charge that the administration is engaging in a 2008-style bailout for wealthy banking executives – even if it is not accurate – is an easy one for Biden’s political opponents to make and is complicated for the White House and the Treasury Department to refute. At the same time, however, the likely political impact of a widespread banking crisis if First Republic Bank was simply allowed to fail could prove even more damaging to Americans generally and to the Biden administration, especially ahead of 2024.

Prospects for the economy are also being darkened by the deepening standoff between Biden and congressional Republicans, who are demanding steep spending cuts in return for raising the government’s borrowing authority. If the debt ceiling is not lifted by the summer, the US could default on its obligations, setting off an economic plunge that could cause a recession, create an unemployment crisis, gut America’s reputation as a safe haven for investors and harm the global economy. The president is accusing Republicans of holding the economy hostage to politically motivated demands, and said he will only discuss spending matters in the context of the budget, not in relation to the debt ceiling.

Some progressive Democrats have balked at the idea that already mighty banks will get bigger by stepping in to snap up assets of troubled banks. They have also claimed that banking deregulation efforts by the Trump administration made failures more likely.

Democratic Rep. Ro Khanna represents a California district that includes part of San Francisco – home to some troubled regional banks that have played an important role in expanding the high-tech sector. On Sunday, he called for a shift in federal government policy to ensure all bank deposits. Currently, the government only insures deposits up to $250,000.

“Right now, they may need to work with banks and private capital to save First Republic. I mean, that is the state we’re in. But we can move quickly,” Khanna said on CBS’ “Face the Nation.”

Khanna argued that the FDIC should pursue the lowest cost option to save First Republic depositors.

“We also need reform. I mean, look at what has happened. … Every time the economy heats up, we somehow say, deregulate, deregulate, and it never works out.”

The First Republic crisis built last week after shares in the bank plunged from $122.50 on March 1 to around $3 a share as of Friday amid what turned out to be unfounded expectations that the FDIC would step in by end of day and take control of the San Francisco-based bank and its deposits and assets.

The Wall Street Journal reported Sunday that JPMorgan Chase and PNC Financial were among the big banks bidding on First Republic in a potential deal that would follow an FDIC seizure of the troubled regional bank. There was no immediate comment from the FDIC or those banks.

Some of the country’s biggest finance firms, JPMorgan and PNC, had previously attempted to stabilize First Republic with $30 billion in deposits, but the move failed.