On Wednesday, a group of investors led by former Treasury Secretary Steven Mnuchin intervened to save New York Community Bank, which was struggling due to exposure to a declining real estate market and mishandled internal management. The investors contributed over $1 billion to the bank.
Mr. Mnuchin contributed $450 million through his private equity business, Liberty Street Capital, with additional funding coming from investors such as the billionaire Kenneth Griffin’s hedge fund, Citadel. As part of the agreement, Joseph Otting, a seasoned banking executive and close associate of Mr. Mnuchin, will become NYCB’s third CEO in as many months.
With the first anniversary of Silicon Valley Bank’s failure approaching, authorities in Washington have been watching a bank that has been lurching from shock to shock this year. The new capital is intended to support the bank.
As President Donald J. Trump’s Treasury secretary, Mr. Mnuchin, a Wall Street seasoned veteran, stated in a statement on Wednesday that he was “aware of the bank’s credit risk profile,” but he also thought NYCB had “a strong foundation for future growth.”
As the market continues to decline with high vacancy rates in apartment and office buildings after the rise of remote work, New York Community Bank’s problems started when it reported a $240 million loss in its most recent earnings report in January, primarily related to real estate loans. The bank was severely damaged by its excessive focus on loans to rent-regulated apartments, whose prices have declined as a result of regulations limiting its capacity to make profitable improvements to the buildings.
The lender’s unexpected results startled analysts and investors, sending its shares down quickly and escalating concerns about its financial stability.
Not helping was the fact that NYCB fired CEO Thomas R. Cangemi only last week after revealing years’ worth of additional write-downs totaling billions of dollars and announcing it would look into the accuracy of reams of previous financial filings. Several credit rating agencies downgraded the bank as well.
The Long Island-based lender expanded rapidly over the previous year after acquiring a sizable portion of the assets of Signature Bank, another bank that failed during the economic crisis in March of last year. Flagstar Bank is one of the lender’s more than 400 branches.
Mr. Cangemi, who oversaw NYCB’s acquisition of Signature assets before his resignation, openly attributed the company’s current problems to the strains of growing so rapidly. He said that as a minor bank, it would not have been compelled to adhere to certain laws.
Autonomous researcher David Smith told clients that he initially thought Wednesday’s news was a sign of “desperation” on the part of NYCB, but that, after more consideration, it was “the brightest ray of hope” the bank had seen in months.
There is a lengthy relationship between Mr. Mnuchin and the incoming CEO, Mr. Otting. 2010 saw the hiring of Mr. Otting to manage OneWest, a bank in trouble in California that Mr. Mnuchin and others had acquired during the 2008 financial crisis. Mr. Otting left OneWest in 2015 following its acquisition by CIT Group.
Mr. Otting assumed the position of comptroller of the currency in 2017, supervising a major regulator of the banking sector. At the time, Mr. Mnuchin served as Treasury Secretary.
Mr. Otting was a divisive figure in the government, battling with other regulators and infuriating opponents who claimed his plans would have undermined laws forcing banks to lend to low-income people and invest in underprivileged areas.
Over the last five days, the investment came together quite rapidly, according to a person involved in the negotiations. Among the deal’s backers are the private equity companies Hudson Bay and Reverence Capital. Together with members from the two private equity groups, Mr. Mnuchin and Mr. Otting will join the bank’s board of directors.
Following the Wall Street Journal’s earlier revelation that NYCB was looking to raise capital, the bank’s shares fell so sharply that trading was suspended on the New York Stock Exchange. Nevertheless, NYCB shares surged and then plummeted when trading resumed following the bank’s public disclosure of the reorganization, finishing the day with a 7 percent gain.
They are still down about 67% for the year.
As of last month, NYCB has over $100 billion in total assets, including $83 billion in deposits. Being one of the biggest mortgage servicers in the country, Flagstar is largely dependent on the health of the property market for its continued existence
