The other option is “do nothing.” First Republic reported earnings on Monday, and they were legendarily awful:
Across the industry, First Republic’s quarterly earnings report on Monday has come to be regarded as a disaster. The firm announced a larger-than-expected drop in deposits, then declined to take questions as executives presented a 12-minute briefing on results.
But First Republic reported a profit. The problem, for First Republic, is that lots of its low-interest deposits have fled, and it has had to replace their funding by borrowing from the Fed, the FHLB and the big banks at much higher rates. Meanwhile it still has lots of long-term loans made at low interest rates. If you borrow short at 0% to lend long at 3%, and then your short-term borrowing costs go up to 5% while your loans stay the same, you will be losing 2% a year on your loans, and that is roughly the state that First Republic finds itself in. But it is not exactly the state that First Republic finds itself in: It still has some cheap insured deposits, some short-term assets, some floating-rate assets, some fee income, and in fact it has managed to scrape out a profit even as rates have moved against it. Can that last? I mean, maybe not:
The deposit run has forced First Republic to rely on other, more expensive funding. That makes it hard to generate interest income, and at some point it might not be able to.
“They’ve never been super profitable,” said Tim Coffey, managing director and analyst at Janney Montgomery Scott. “Now you’re not growing and you’re layering on really high borrowing and funding costs.”
But a bank can stay in business even with some quarterly losses, as long as it remains well capitalized, and as a technical matter First Republic has enough capital to withstand some unprofitable quarters. And if you muddle along for long enough, the situation can right itself: The long-term low-interest loans will roll off and be replaced with higher-interest new loans, and First Republic’s interest margins will start to expand again. It might work! If you are a First Republic shareholder, “do nothing and hope the business recovers” is clearly the best option.
Of course deposits might keep flowing out, but so what? First Republic is now funded in large part with loans from the Fed and the FHLB, and I suppose they could just lend it some more money. When Silicon Valley Bank failed, the Fed put in place a new Bank Term Funding Program that was designed for more or less this purpose: The BTFP lets banks borrow against their assets without taking into account interest-rate losses, so that they can replace fleeing deposits with loans from the Fed. US regional banks spent years in a low interest rate environment, they were caught out by a rapid rate hiking cycle, and the Fed responded to that problem by lending them money to smooth out the transition.
The advantage of doing nothing is that nobody has to take any losses now. But the regulators seem to want to move. Bloomberg again:
The clock for striking such a deal began ticking louder late last week. US regulators reached out to some industry leaders, encouraging them to make a renewed push to find a private solution to shore up First Republic’s balance sheet, according to people with knowledge of the discussions.
The calls also came with a warning that banks should be prepared in case something happens soon.
And one way for something to happen soon is if the Fed stops lending to First Republic:
As weeks keep passing without a transaction, senior [FDIC] officials are increasingly weighing whether to downgrade their scoring of the firm’s condition, including its so-called Camels rating, according to people with direct knowledge of the talks. That would likely limit the bank’s use of the Fed’s discount window and an emergency facility launched last month, the people said.
Why? Why close a bank and take billions of dollars of losses if you don’t have to? The consequences of doing something are obvious and bad; the consequences of doing nothing are a bit more diffuse.
But let’s talk about some of them. One is that there are legal limits on the Fed’s ability to keep propping up First Republic. I mentioned the BTFP, the Fed’s post-Silicon Valley Bank program that lends to banks at 100% of the face value of their collateral, even if that collateral has lost money due to rising interest rates. But only US Treasury and agency securities are eligible to be BTFP collateral, and First Republic’s assets are mostly loans. Those loans tend to be pretty safe — they are mostly mortgages to rich people — but they are very exposed to interest-rate risk, so they have lost a lot of value. And it can’t use them to borrow from the BTFP.
Meanwhile these loans are eligible collateral at the Fed’s discount window, its more standard lending program, but the discount window lends against the market value of collateral, and these loans have lost a lot of value. If deposits keep fleeing from First Republic, its ability to replace those deposits with Fed loans depends on the market value of its assets, which means it might run out of capacity. If the FDIC is worried about that happening sometime soon, then there is some urgency to do something first.
More generally, the theory of central banking is that central banks should lend to solvent banks, but not prop up insolvent banks. The Fed’s statutes limit its ability to lend to undercapitalized banks. In some obvious economic sense, First Republic is undercapitalized — its assets are worth less than its liabilities, which is why we are talking about this — but legally it is fine and has plenty of regulatory capital.
But at some point, if the regulators conclude that First Republic is not viable, it is at least, like, embarrassing for them to keep lending it money. In the limit case, if all of First Republic’s deposits fled, you could imagine the Fed lending it $210 billion (up from its current $105 billion of Fed/FHLB money) so it could continue to limp along. But that’s bad! You don’t want a bank out there doing business, making loans, paying executive salaries, that is entirely funded by the Fed. You need some private-sector endorsement of the bank for the Fed to keep supporting it.
Also: The losses have already happened. First Republic made loans at low interest rates, now interest rates are higher, and so its loans are not worth what they used to be. As an accounting matter, those losses don’t have to be recognized yet; First Republic’s balance sheet is still technically solvent, and it can muddle along for a while. But economically the difference between “the banking system reports billions of dollars of losses today and then normal profits afterwards” and “the banking system bleeds these losses into lower accounting profits for the next few years” is not that great, and the former is more clarifying.

US economic growth slowed sharply in the first quarter of the year, despite strong consumer spending resilient to interest-rate rises designed to tame historic inflation.
The latest GDP figures released by the US commerce department show that the world’s largest economy slowed sharply from January through March, to just a 1.1% annual pace as businesses reduced inventories amid a decline in housing investment. The abrupt deceleration from 2.6% growth in the final three months of 2022 and 3.2% from July to September came in significantly under economists’ expectations of a 2% increase.
The figures indicate that aggressive interest rises designed to tame inflation are beginning to produce what US central bankers desired – a slowing economy coupled with reduced wage increases and a tighter job market without tipping it into outright recession.
“The data confirm the message from other indicators that while economic growth is slowing, it isn’t yet collapsing,” said Andrew Hunter, chief US economist at Capital Economics. “Nevertheless, with most leading indicators of recession still flashing red and the drag from tighter credit conditions still to feed through, we expect a more marked weakening soon.”
Resiliency in consumer spending, which rose 3.7%, reflected gains in goods and services and came as business investment in equipment recorded the biggest drop since the start of the pandemic in 2020 and inventories dropped the most in two years.
The Federal Reserve has indicated that while it has slowed the rate of interest rises, it expects commercial lenders, buffeted by the collapse of two regional banks this year, to tighten lending standards.
Many economists say the cumulative impact of Fed rate hikes and tighter lending requirements have yet to work their way through the system, presenting central bankers with a dilemma over whether to continue raising rates.
“The last thing the Federal Reserve wants to be doing is raising rates as the economy begins to grind to a halt and potentially exacerbating the situation,” said Marcus Brookes, chief investment officer at Quilter Investors. “The coveted soft landing is looking increasingly difficult to achieve and we are now getting towards a position where the market may become concerned that stagflation could be a likely possibility.”
There is widespread skepticism that the Fed will succeed in averting a recession. An economic model used by the Conference Board, a business research group, puts the probability of a US recession over the next year at 99%. That expectation is compounded by political risk, given congressional Republicans could let the US default on its debts by refusing to raise the statutory limit on what it can borrow. Wider global economic conditions are also in play.
Earlier this month, the International Monetary Fund downgraded its forecast for worldwide economic growth, citing rising interest rates around the world, financial uncertainty and chronic inflation.
The IMF chief, Kristalina Georgieva, said global growth would remain about 3% over the next five years: its lowest such forecast since 1990.

Lucas: Customer service complaints have always been sort of a feature of Vanguard’s history. If you go back to the days when Bogle led the firm—this is a point that I made at that conference—there were lots of complaints over the years about Vanguard’s customer service. I like to compare Vanguard to, say, those of you who shop at Aldi. If you go to Aldi, you have your quarter, you get your grocery cart, you bring your own bags or you put it in boxes. I would say Vanguard has got more customer service ethos than that, but it is something where it’s not necessarily been known for high-touch customer service. And it is trying to become a leader in customer service and to really improve its technological offer.
So, what Vanguard is trying to do is, because it has experienced over the course of its history and continues even in this first quarter, experienced such asset growth, it’s trying to enable investors to do as much as they can as simply as they can online, so without talking to a human advisor. And they’ve really made investments in technology. They’ve modernized their technology platform, and they’ve seen increased resiliency and increased customer service scores.
The big snafu they made in 2020 was—this is Vanguard, they’re always thinking about investor assets and costs and trying to save money on behalf of investors—so, in 2020, when the market turned down, they stepped back and they looked and they saw that historically when the market falls, client communications sort of fall off a cliff. So, they actually slowed their hiring of customer service representatives right at a time when—in fact, what happened with the lowering of interest rates is that investor demand shot up and that caused, I think, significant wait times and lots of frustration. They have normalized that, and I think are committed to sort of being a little bit more, call it, I don’t know if cautious is the right word, but they’re going to be more prone to overspend and I think on what they expect they will need to try and improve customer service. In talking with Vanguard leadership, they feel like they’ve heard that and they’re trying to become known for best-in-class customer service. That is a goal of theirs, and they say they’ve made progress in that. It remains to be seen. We hear a lot of comments from that here at Morningstar. But the big thing always to keep in mind is that Vanguard serves a lot of customers. So, you’d expect that some of them would be frustrated. And I’ve heard both success stories and stories of frustration, and we’ll see if the stories of frustration are minimized over the coming years.

In the lead/feathers test, I bet people are quite sensitive to the inertia (both linear and angular) when lifting the two supposedly identical boxes and the experimenters neglected this.

Weight illusions--where one object feels heavier than an identically weighted counterpart--have been the focus of many recent scientific investigations. The most famous of these illusions is the 'size-weight illusion', where a small object feels heavier than an identically weighted, but otherwise similar-looking, larger object. There are, however, a variety of similar illusions which can be induced by varying other stimulus properties, such as surface material, temperature, colour, and even shape. Despite well over 100 years of research, there is little consensus about the mechanisms underpinning these illusions.

I know. But it seems irrelevant to say Americans aren't saving enough when so many have nothing left over to save after paying their bills. I often think the constant complaints posed in the media over "financial illiteracy" are really just a coded repeat of the "personal responsibility" mantra, blaming the victims of massive income inequality for their own suffering when that inequality is systemic and, largely, by design, and not primarily due to individual moral or ethical failings. Yes, people should save more and put more in their retirement plans. But there are often really good reasons they can't, and in certain cases lousy reasons. There tends to be a fixation on the lousy reasons.

Nicholas Fund. Third ave value. Sogen international. Mutual shares. Of course Fidelity Magellan. Those are just the ones I can remember. But they come and they go.