Federal Reserve Chairman Jerome Powell punches Treasury Secretary Steven Mnuchin after a House Financial Services Committee hearing on “Oversight of the Treasury and Federal Reserve’s Pandemic Response” at the Rayburn House Office Building in Washington, U.S., December 2, 2020.
Greg Nash | Reuters
The $1 billion-plus injection that New York Community Bank announced Wednesday is the latest example of private equity players coming to the rescue of a wounded U.S. lender.
Led by $450 million from ex-Treasury Secretary Steven Mnuchin’s Liberty Strategic Capital, a group of private investors is plowing fresh funds into NYCB. The move calmed concerns about the bank’s finances, as it closed higher on Wednesday after a steep decline earlier in the day.
That cash infusion follows last year’s acquisition of PacWest by Banc de California, which was anchored by $400 million from Warburg Pincus and Centerbridge Partners. A January merger between FirstSun Capital and HomeStreet also tapped $175 million from Wellington Management.
Speed and discretion are key to these deals, according to advisers on several recent transactions and outside experts. While selling shares into public markets could theoretically be a cheaper source of capital, it’s simply not available to most banks right now.
“Public markets are too slow for this kind of capitalization,” said Steven Kelly of the Yale Program on Financial Stability. “They’re great if you’re doing an IPO and you’re not in a sensitive environment.”
In addition, If a bank is known to be actively raising capital before being able to close the deal, its supply could face intense pressure and speculation on its balance sheet. That’s what happened to Silicon Valley Bank, whose failure to raise funding last year was effectively its death knell.
On Wednesday, headlines around midday that NYCB was seeking capital sent its shares down 42% before trading was halted. The stock rose later on the news that it had successfully raised funding.
“This is the unfortunate lesson of SVB,” said an adviser to the NYCB transaction. “With private deals, you can talk for a while, and we almost reached the finish line before there was any publicity.”
Mnuchin’s achievement
Mnuchin reached out to NYCB directly to offer support amid headlines about the enforcement it was under, according to a person with knowledge of the matter. Mnuchin is not just a former treasury secretary; in 2009, he led a group that bought California bank IndyMac out of bankruptcy. He eventually turned the bank around and sold it to CIT Group in 2015.
Now, with the assumption that Mnuchin and his fellow investors have seen NYCB’s deposit levels and capital situation — and are comfortable with them — the bank has a lot more time to fix its problems. Last week, NYCB revealed “material weaknesses” in the way it reviewed its commercial loans and delayed the presentation of a key annual report.
“This buys them a lot of time, meaning the FDIC isn’t going to come get them on Friday,” Kelly said. “You have a billion dollars in capital and a huge backing from someone who has seen the books.”