Will the First Republic Bank (FRC) Defy the Dreaded Cramer Curse or Enter Into Receivership?

The CNBC host Jim Cramer must have his pound of flesh – so goes the lore around his stock picks that have a unique ability to sour, often with disastrous results for the recipients of such commendations. Now, as the First Republic Bank (FRC) is gasping for an influx of fresh liquidity to remain afloat, the question emerges: can the beleaguered bank defy the dreaded Cramer curse?

When the Silicon Valley Bank (SVB) collapsed in March, First Republic Bank was quickly identified by the market as the next domino to fall. However, the bank continued to limp along, helped by an influx of $30 billion in new deposits from a consortium of banks. This cash influx was meant to partially fill the gaping hole in FRC’s books left by a mass exodus of customer deposits.

As part of its earnings for the first quarter of 2023, the First Republic Bank disclosed this week that its deposits declined from $172 billion at the end of 2022 to just $104.5 billion toward the end of Q1. Critically, this figure is inclusive of the $30 billion deposit from a consortium of banks. In reality, therefore, FRC lost around $100 billion in deposits within the span of a few weeks!

While this deposit outflow has largely stabilized in recent weeks, as illustrated by the fact that the bank’s aggregate deposits fell just 1.7 percent between the end of Q1 and the 21^st of April, it did create an asset-liability mismatch, which the bank has tried to curtail via short-term borrowing at an interest rate of around 5 percent per annum – clearly an unsustainable enterprise. Let’s delve deeper.

What Went Wrong for the First Republic Bank?

The video embedded in the tweet above does a fairly good job of summarizing First Republic Bank’s current predicament. Basically, when interest rates were at multi-decade lows a few years back, FRC targeted the richest people throughout the US and offered them ultra-cheap interest-only mortgages – where the principal amount of the mortgage does not factor into the interest payments, often for a period of ten years.

Obviously, as the Federal Reserve embarked on an aggressive campaign to hike interest rates in 2022, the market value of these ultra-cheap mortgages declined, given the negligent cash flow that they generate.

Concurrently, First Republic Bank was forced to borrow around $100 billion on a short-term basis to fund the outsized deposit outflow. The bank is now paying around 5 percent in blended interest (on an annual basis) on these borrowings. This is patently unsustainable.

First Republic Bank shares are now down a whopping 95 percent so far this year. While the bulk of the decline took place in March at the height of the SVB crisis, the stock took another significant leg down this week when it emerged that the bank was looking to sell between $50 billion and $100 billion of its long-dated securities and mortgages to stabilize its operations.

What are the Options?

The simplest option to resolve this crisis is for the First Republic Bank to enter into receivership (where the FDIC basically takes over). However, there is no political appetite for this step. Moreover, there is a risk that another bank failure might spur a fresh wave of deposit outflows from other medium-sized banks.

The only viable option for the First Republic Bank is to be rescued by its bigger peers. A proposal that is currently in consideration involves setting up a Special Purpose Vehicle (SPV) by FRC’s larger peers. This SPV would then purchase some of the distressed mortgages in return for First Republic Bank’s preferred shares and warrants. This would then allow the beleaguered bank to repair its books and raise additional equity. However, there is a catch. FRC wants to unload these loans at an above-market price. Given the negligent cash flows that these mortgages generate, this is a difficult undertaking.

Clearly, there is an impasse. Moreover, perhaps in a bid to soften the stance of the First Republic Bank and force other banks to play ball, the FDIC issued a threat on Wednesday that FRC’s capacity to borrow from the Federal Reserve could be cut, which would result in a bank failure.

Meanwhile, the administration has communicated that it is currently “unwilling to intervene,” leaving First Republic Bank at the questionable mercy of the market and an even stingier one of Jim Cramer.

Will Jim Cramer Have His Pound of Flesh?

The inverse Cramer strategy – which involves flipping Jim Cramer’s recommendations in the light of his unceasing ability to parrot the consensus view, where there is hardly any alpha – was a resounding success in 2022. However, the strategy has been largely floundering ever since the launch of a dedicated Inverse Cramer ETF (SJIM).

Interestingly, the Inverse Cramer Tracker ETF (SJIM) is down 1.28 percent so far this year. In the same timeframe, the Long Cramer Tracker ETF (LJIM) is down a steeper 1.76 percent. Moreover, IndexOne’s i1 Inverse Cramer Index is currently down around 8 percent on a year-to-date basis. Clearly, this strategy is no longer yielding stellar results, as we flagged in a post a few weeks back. Nonetheless, the Cramer curse remains a potent force.

Consider the fact that First Republic Bank shares have fallen over 25 percent since last month when Jim Cramer had endorsed it as a “very good bank.”

As for the First Republic Bank’s prospects, it is never a good sign when high-profile politicians start abandoning the proverbial ship. The FDIC typically takes receivership action on Fridays. Given the frailty of this situation, it remains to be seen whether FRC would be able to defy the odds or succumb to the inevitable: financial gravity and the Cramer black hole.

About the author: Writing is my one incontrovertible passion. Over the past six years, he has authored over 2,200 distinct articles on financial and tech-related topics, spanning nearly 1 million words. And he has been a member of Wcctech mobile team since 2025. As an alumnus of the University of Toronto, Rotman Commerce Program, I bring nuance, in-depth knowledge, and a unique perspective to every topic that I cover. When I'm not writing, I'm traveling the world, exploring hidden confectionaries and restaurants as an aspiring food connoisseur.

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