The 1994 regulatory loophole that led to Jamie Dimon’s First Republic coup

It was the bank’s namesake who became de facto central banker and bailed out the U.S. Financial system in the panics of 1893 and 1907. His protégé Thomas Lamont tried to play a similar role in 1929, although with less success. And of course, Dimon himself starred in the 2008 crisis, buying both Bear Stearns and then Washington Mutual. So no one should be surprised it was Dimon who stepped up this week to buy the operations of failing First Republic Bank.

For a brief time, the first J.P. Morgan was a target of Teddy Roosevelt’s trust-busting efforts. But in the end, he escaped largely unscathed. Why? Presumably because the powers-that-be decided he was more valuable as a friend than a foe. Dimon is now benefitting from a similar dynamic.

As Shawn Tully explains in this must-read Coins2Day piece, the federal law passed in 1994 allowing interstate banking limited the total share of the nation’s deposits that any one bank could hold to 10%. But that cap only applies to acquisitions. Since 2014, the nation’s three largest banks—JPMorgan, Bank of America and Wells Fargo—have all been over the threshold, in part because of their acquisitions in the last financial crisis, and therefore prohibited from buying other banks. JPMorgan’s share of deposits, prior to this purchase, stood at over 16%. But the 1994 act also included a loophole for banks rescuing other banks about to be shut down by the FDIC. And voila! JPMorgan’s coup.

Unlike the 2008 acquisitions, which happened as the financial problems were still gathering steam, this one seems to mark the end of the action. “I think the banking system is very stable,” Dimon declared in his comments. “This part of the crisis is over.” But it leaves JPMorgan bigger than ever, and Dimon as the man to see in a financial crisis.

More news below.

Alan Murray
@alansmurray
[email protected]

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This edition of CEO Daily was edited by Claire Zillman.