Shareholders of First Republic Ruined

First Republic Bank is in financial trouble and is expected to be effectively nationalized by the federal government. The FDIC will oversee the sale of some of its assets, which could be acquired by a larger bank, possibly JPMorgan. Despite some investors taking a risk and hoping that First Republic could save itself with assistance and remain independent, the stock price has plummeted to $2.33, a significant decline from its 52-week high of $171.09. The stock is about to become worthless.
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The federal government does not want 2023 to look like 2008 when Lehman Bros. and Bear Stearns fell apart in the blink of an eye. Suddenly, the entire financial system in the U.S., and perhaps the world, was on the brink of a catastrophe. Silicon Valley Bank’s demise is only a few days old. A pair of failed banks might trigger an unimaginable disaster. (Click here for the 25 biggest bankruptcies in American history.)

Many investors, like some gamblers, are willing to bet on anything. An NFL team with 1,000 to 1 odds of winning the Super Bowl is an apt comparison to First Republic’s position as it existed just a few days ago. However, the long-odds gambler loses everything but thinks he has a chance until the last moment.

The proof of the wave of gambling over First Republic’s price can be seen in the trading volume. It was over 125 million for five days recently, and reached above 200 million on a single day during that period. Normal daily volume a month ago was closer to two million shares a day.

The First Republic traders are similar to those in Bed Bath & Beyond, the once-large retailer that just went under. Its share price dropped to $.10. Its 52-week high was $30. Trading volume in its shares recently ran above 100 million a day and above 200 million some days. People who bought at $1 thought it might be rescued by a financial firm that puts money into distressed bonds. Bed Bath & Beyond’s demise kept even professional investors who like to take long odds out of the picture.
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Did some investors make money on First Republic shares? Certainly. They were the ones who bought at $2 in January and sold at $5 in February before the stock started its final run down. Some short sellers made money on bets that the stock would go lower. For every winner, there were one or more losers.

As WC Fields said, “Never give a sucker an even break.” People who lost money on investing in the First Republic didn’t get a break. (Central banks are loading the boat on gold. Should you?)