From First Republic to Fallen Republic in a matter of weeks – no one said running a bank during a period of massive economic turmoil was easy.
Yet the swift unravelling of San Francisco-based financial institution First Republic is shocking, not least because blame for the fires that Washington has been scrambling to put out in the US banking system can be laid squarely at the door of none other than the American president himself – not a great look as he prepares to run for a second term.
On Friday night, shares in the bank plunged by more than half amid reports it was about to enter receivership.
Republicans have warned repeatedly that the seemingly limitless economic stimulus of the Biden administration risks catastrophic consequences for the American economy, and now they have evidence in abundance: a string of bank failures triggered by a sharp change in the credit cycle, as the Federal Reserve scrambled to combat the galloping inflation of the Biden era.
It seems undeniable that Biden’s wreckless post-pandemic spending is at least partly to blame for the rocketing prices that the central bank is now battling to rein in.
The president, like hapless Bank of England Governor Andrew Bailey, was also guilty of downplaying inflation for too long, arguing it was a temporary phenomenon.
“No serious economist” thinks unchecked inflation is on the way, Biden told reporters in June, 2021, just months after revealing his $1.9 trillion (£1.5 trillion) post-Covid American Rescue Plan.
True, that astronomical stimulus package has been credited with speeding the US recovery, as well as contributing to record low unemployment, something that Biden will undoubtedly dwell a lot on as he steps up his campaign for re-election in the coming months.
Yet, at the same time as dragging the economy out of the mire, his relief program appears to have put the rocket boosters under inflation, as many experts feared it would.
The day before the legislation was signed off, inflation had come in at 1.7pc. By the end of the year, with the bank accounts of three quarters of the American workforce swelled by Covid cheques of $600 and then a further $1,400 a few months later, the impact of Biden’s fiscal bonanza was plain to see. The US economy grew by 5.7pc in 2021, yet at the same time core inflation leapt from 2pc to a 40-year high of more than 10pc.
Deciphering just what proportion of inflation Biden’s intervention is responsible for isn’t easy. Several studies that White House officials prefer to point to, conclude that the effect has been relatively minor.
But the findings of several other authoritative papers, including those produced by economists at both the San Francisco and Chicago federal reserve, as well as the IMF, estimate that somewhere between three and four percentage points is directly attributable to the Government’s fiscal bazooka.
What is indisputable is that as inflation has soared, the Fed has aggressively hiked interest rates in a vain attempt to keep up. As a result, the value of billions of government bonds that many banks had invested in on the basis that they were ultra-safe securities, has cratered, creating a calamitous mismatch between assets and deposits, which has been further exacerbated as spooked borrowers have run for the hills.
As First Republic teeters on the brink, there isn’t a corner of the establishment that will emerge from the chaos with its reputation intact. For financial regulators, there’s only one thing worse than a failed bank, and that’s a failed attempt to save the same bank.
Washington has been trying to cobble together a salvage plan since mid-March. An attempt to prop the bank up with a $30bn lifeline led by JP Morgan’s superstar boss Jamie Dimon was a spectacular failure – customers continued the stampede for the exit and by the end of March $100bn of deposits had evaporated.
Despite six frantic weeks of rescue efforts, First Republic’s fate looked inevitable this week. Its share price imploded, prospects for a white knight were deemed slim, and the US government was reluctant to keep stepping in to support its banks.
Yet, the White House could not afford to simply let First Republic go bust because of the risk of a full-blown bank run, and having effectively bailed out depositors at both Silicon Valley Bank and Signature Bank it will be difficult to justify not doing the same again.
Ultimately, what is needed most to restore confidence is for every major bank to come clean about the true value of their balance sheet assets and for those same banks to plug any shortfall with fresh equity. Only then will the crisis go away.
However the saga ends, the President shows little inclination of shouldering any of the blame. Yet Biden’s policies created the ideal conditions to leave Wall Street ablaze, and now we all risk getting burnt.