The seeds of First Republic Bank’s downfall were sown in the jumbo mortgages of Silicon Valley, where a unique strategy to loan wealthy individuals extraordinary sums of money blew up in spectacular fashion, Bloomberg News reported. In the early 1980s, First Republic Chairman Jim Herbert, then running San Francisco Bancorp, wanted to get into a new line of business. The Bay Area’s high earners were coming to him and asking for unusually large loans to buy pricey properties in the area. “Why don’t we do a couple of these and see how they go? Can’t bankrupt the whole bank,” Herbert said to the firm’s president, according to an account of the conversation on First Republic’s website. Years later, after Herbert left San Francisco Bancorp and founded First Republic, his new bank became known for handing out interest-only mortgages at rock-bottom rates to borrowers with high incomes and exceptional credit scores. Typically, they didn’t have to start repaying the principal for a decade. Demand for the loans surged during the pandemic as wealthy buyers sought mortgage deals that would allow them to keep the bulk of their money in higher return investments. The rush helped First Republic double its assets in four years. It also contributed to its collapse. In the early hours of Monday morning, JPMorgan Chase & Co. agreed to acquire First Republic from the Federal Deposit Insurance Corp., which seized the bank after a tumultuous period in which its stock had cratered and depositors had pulled almost half their money. Just a few weeks earlier, Wall Street’s biggest banks had stepped in to shore it up with their own cash.
