NYCB bailout: the hedge funds are out

[+ stevenkesslar]

There was an interesting bailout of New York Community Bank today.   It has a quaint smallish sounding name.  But it's the 35th largest bank in America, having merged with Flagstar and taken over some of the assets of failed Signature Bank in the last few years.

Beyond being one bank in trouble, for CNBC and Fox Business, NYCB has come to represent the (maybe) looming national problem of distressed commercial real estate.  And the distressed regional banks that hold much of the distressed CRE loans.  If you told me we are going to have a recession in the next year or two, and I have to guess why, I would go with some CRE loan contagion as my explanation.  Something like the subprime lending mess that caused the Great Recession.  Except this time involving multi-family housing and office buildings.  Instead of Ms. Middle America getting foreclosed on, or seeing half her home equity suddenly vaporized.

Anyway, what happened today suggests that distressed CRE loans will not be causing a recession anytime soon.  What they will most likely end up causing is a hugely profitable feeding frenzy for hedge funds and rich investors.  Including former Treasury Secretaries, as it turns out.

MARKETS

NYCB shares rebound after troubled regional bank announces $1 billion capital raise

On a personal level, I'll explain it this way.  I was a very highly regarded hooker for many years.  But I never would have guessed at some point I would jump in bed with Steve Mnuchin.  Today I did.  And I'm grateful.  I woke up owning 8,000 shares of NYCB.  All of which I bought in the last few weeks at what I thought were  fire sale prices averaging about $4 a share.  I'll go to bed owning 10,000 shares that cost about $3.80 a share and pay a 5 % dividend.  And will likely go up a lot in the next few years.  But at one point today I had a 40 % intraday loss.  And I figured I was going to lose everything.  Until Steve suddenly jumped in bed with me.  Or something like that.  What a guy!  And it was a threeway, too.  He even brought the former Comptroller in bed with him.  Woo hoo!

NYCB is a bit of an outlier.  Because about half of its loans are in multi-family buildings, about half of which are rent-stabilized.  So the combination of tight rent increase controls and high interest rates when landlords have to refi is not a good match.  And it will cause rising delinquencies at the banks that own these loans as they have to be refinanced at higher rates in 2024 and 2025.  That's what started the freefall for NYCB.  It was worth over $10 in January.  But only $1.70 at one point today before they stopped trading.

There probably is going to be a lot more of this in the next few years.  Especially with office buildings.  I have a hard time seeing how landlords (I am one) are being screwed by a national affordable housing crisis.  But I can see the problem with having to refi loans on multi-family buildings at high interest rates.  Which won't go away anytime soon.  The real problem, most analysts say, is the office buildings and commercial structures.  Whether those office buildings or malls ever get back to the good old days is a good question.  Like I said, if there is any recession risk out there, this is what I'd put at the top of the list.  Some kind of financial contagion.

Hedge funds bet on U.S. real estate rebound

That article was written two days ago.  What Team Mnuchin and his hedge fund buddies did today is proof of concept.  I don't think what happens at hedge funds drives the needle on whether we have a recession or not.  That said, the word "rebound" is appropriately placed in that headline.  My guess is that hedge funds and various investors (even the old dudes like Warren Buffet) will step in and make killings on distressed CRE loans.  They are raising the money to do so now.  It may not be good news for some commercial real estate owners, or some regional banks  But if you're not one of them, who cares?  You can make a good argument that the macro effect for the rest of us is economic recovery.  Not recession. Real estate rebounds don't usually cause recessions.

One final point.  For those of us who think investing is a rigged game, this is a great example.  They stopped trading on NYCB when the shares had tanked about 40 % in a  few hours.  After the Wall Street Journal reported that NYCB was seeking a capital infusion.  Meaning they were probably near death's door.   Then about an hour later this long press release shows up.  I have to imagine this deal was in the works for days or weeks.  Steve And Friends get something like half a million shares of the bank they will revive at $2.  The rest of us normal people can buy it $3.50, if we are willing to take the risk.  If you owned it last year, you're fucked.  For now at least.  Woo hoo!  Steve and Friends did this at Indymac a decade ago.  They sold that bank for double what they bought it for, and went on to be Treasury Secretary and Comptroller.  And now they are about to own half or so of the 35th largest bank in the US for $2 a share.  But that's not a rigged game, is it?   🤔

I just want to know whether it was Steve, or a friend, who leaked the story to the Wall Street Journal.  Which set up the final rollercoaster ride today.  There are people on Yahoo message boards who still think the bank will fail.  Somehow, when the former head of the OCC ends up running the bank the OCC regulates, that just seems rather unlikely.

This is what makes America, and capitalism, what it is.  Ya gotta love it.

 

Edited March 7 by stevenkesslar

[MikePDNA51]

So I should buy shares of NYCB? 

[+ stevenkesslar]

4 hours ago, MikePDNA51 said:

So I should buy shares of NYCB? 

No.

That's the short answer .  Now here's the diatribe.  I find this fascinating.

It's not a bad idea right now.  If I go by the Yahoo conversations of regular small investors who own the stock, they think maybe in a week after the deal is closed and the psychodrama settles down it could be worth $5.  Somebody who maybe knows what they are talking about says diluted book value is $6.  Or maybe in a year the A Team soon to be in charge will get it to $10.  Mnuchin and pals did this for a reason.  But they got in for $2 a share.  Which is a fire sale price.

Part of my thinking is that what I could buy it for over the last weeks, which averages $3.87 a share, with a 20 cent a year dividend is 5 % a year.  Not bad.  Hold on to it for a few years, and maybe double what I bought it for.  That's what Steve And Friends did on a big scale with Indymac/One West a decade ago.  But there was a press conference at NYCB on the deal at 8 Am today.  And they announced they are cutting the dividend to one cent a quarter.  So it went from 17 cents a quarter to five cents in January, and now to one cent.  How's that for deflation?  

I think what is even more clear today is that this mainly benefits hedge funds.   It helps when you are a former Treasury Secretary, or Comptroller, of course.  And that is a non-partisan investor statement.  Mnuchin's hedge fund is one color, and has a lot of Saudi and Arab wealth in it.  But there is this:

Why private equity has been involved in every recent bank deal

Turns out the PacWest acquisition last year was a $400 million deal for Warburg Pincus.  Same as Steve paid.  Warburg Pincus is run by Tim Geithner.  Name sounds familiar.  Anyone heard of him?  Something about bailouts? 

These Treasury Secretaries sure get around.  And make very powerful friends.  😉

I posted this in part because this is an absolutely fascinating investment story to me.  These people are vultures.  The Yahoo conversation board on this deal is a very fun read.  Most people are small investors like me who just take it for what it is.  Very savvy sharks who have "regulatory bullet proofing" superpowers (I loved that phrase) were allowed into the pool.  And there are a slew of comments from people who have owned the stock for years.  They feel like they were just eaten alive.  And they were.  Their share price is down like 75 % in one year, even after the "rescue."  And their dividend went from 17 cents a quarter to a penny.  Times are hard, I guess.  But if you want evidence that this is a rigged insider game, this is a textbook example. 

Now that I understand how this played out, it does feel an organized bank robbery.  Mnuchin approached the bank, whose Board Chair he has known for a long time, weeks or maybe months ago.  The $2 fire sale price was finalized yesterday when the stock stopped trading.  How convenient that someone leaked this to the WSJ.  And their reporting just happened to create enough fear and panic to get the price down to just about what Steve And Friends obviously wanted to pay.  Such swell guys!  One long-time stock holder posted about how the bank management seems like they have been systematically trying to create as much fear and panic as possible.  Okay.  But why would anyone do that?  🙄

The other reason I posted this is that I think there is good news in all of this for small investors.  If this rolling CRE loan/regional bank "crisis" is what is supposed to cause the recession that wipes out our stock market gains and our home equity, I think it is a dud.  More likely, it is a narrative that can be used by hedge funds to manufacture or at least "enhance" a crisis that doesn't really exist.  At least not yet.

Anecdotally, one analyst asked the CEO of NYCB today what their actual loan delinquency rate on rent-stabilized multi-family mortgages is.  That is what is supposedly causing the problem.  He did not gibe a specific number, but said low.  They said when you underwrite loans conservatively with 50 to 60 % loan to value ratios, the loans tend to perform.  And are performing.  Even when values go down, like they have in New York thanks to COVID and a 2019 pro-tenant law.  Maybe that was all BS from a bank struggling to survive.  But I don't think NYCB is on death's door.  Apparently, neither do Steve And Friends.  I think they are sharks in a feeding frenzy.  And there is more of this to come, as both CNBC articles I posted suggest.  And it's because the vultures and sharks think values are going up, not down.  They want in, for cheap.

The narrative about how festering CRE loans are going to infect more and more banks (this guy says it will take out 500 banks in the next few years) and take the stock market and economy down with it seems like it is mostly bullshit to me.

Here's the Fed's long term chart on all delinquency rates on all business loans by all commercial banks.  Granted, a very broad category.  But delinquencies are lower than ever.  Where's the crisis?

 

Delinquency Rates for Commercial Properties Increased in Fourth-Quarter 2023

That's not great news for banks who make CRE loans.  But if you call it a crisis, it looks like in most categories the crisis has passed.  Or is mostly declining.  It makes sense that in multi-family, there is no crisis.  Higher inflation is caused in large part by higher rents.  How does that hurt landlords of apartment buildings?  The problem with hotels that were vacant during a pandemic is obvious.  But they are not vacant today, if they survived.  The office problem is getting worse.  But it is not a crisis, it seems.  And probably never will be.

Like I said, I think this is mostly good news for small investors.  If some CRE loans go bad, and it makes a regional bank vulnerable, just call Steve And Friends.  Or Tim And Friends.  They are there to help.  They have money we don't have.  And they are always looking for fire sales.  Real, or manufactured.    😉

Edited March 7 by stevenkesslar

[+ augustus]

On 3/7/2024 at 4:59 PM, stevenkesslar said:

If some CRE loans go bad, and it makes a regional bank vulnerable, just call Steve And Friends.  Or Tim And Friends.  They are there to help.  They have money we don't have.  And they are always looking for fire sales.  Real, or manufactured.

Agreed!! The FDIC has already poured tens of billions of dollars into the regional bank failures a year ago, but things are still deteriorating.   If they think they can turn things around then let them.  The Federal Government already has tens of trillions of dollars in liabilities, and we can't afford any more bailouts.

[+ stevenkesslar]

On 3/14/2024 at 6:27 PM, augustus said:

Agreed!! The FDIC has already poured tens of billions of dollars into the regional bank failures a year ago, but things are still deteriorating.   If they think they can turn things around then let them.  The Federal Government already has tens of trillions of dollars in liabilities, and we can't afford any more bailouts.

I've read like half a dozen articles suggesting that the reason Tim And Friends and Steve and Friends are showing up is that the hedge fund folks smell a commercial real estate recovery.  It makes sense.  First, as incompetent as government can be, it's a good guess the two former Treasury Secretaries have some idea what they are doing.  Second, inflation is down, and interest rates have likely peaked.  Now the question is when do rates start to come down.  Personally I think the doomsayers predicting we will have 500 regional bank closures are full of it.  The more likely scenario is a coming commercial real estate recovery that our pals at the hedge funds want in on for cheap.

I just dumped half the shares I bought in NYCB at $4 at a small profit and am just waiting to see if it goes up toward $5 before I dump the rest.  I bought some shares in a few others regional banks that have dividends of 6- 7 %.  And I will buy more when I close out NYCB completely.  Steve and Friends cut the dividend at NYCB to a penny a quarter once they took control.  It had already been cut from 17 cents a quarter to 5 cents a quarter.  Steve and Friends get hundreds of thousands of shares at $2 a share.  Which basically means they already have a 100 % profit.  So it does seem like, "We get it all.  And you get none."  I think this one was a legal bank robbery.   

I'll follow it for the next couple months.  The shareholders who owned $11 shares before the "crisis" have been posting on message boards about how Sandro DiNello, who rode the GFC foreclosure wave to fame and fortune like Steve and Friends, and who became the NYCB CEO a week or so before the "crisis" led to the vultures sweeping in, seemed to do everything he possibly could to create an environment of crisis.   We'll see.  They are NOT on the FDIC's problem bank list.  And when asked at their presser what the delinquency rates are on these supposedly toxic NYC rent-stabilized multi-family loans, they said they are low.  So it's not at all clear that the bank has real loan problems.  We'll learn soon enough.

The media has focused on the amount of assets held by Silicon Valley, First Republic, and Signature.  Which is fair.  But it still boils down to a few bank failures.  As opposed to something like 500 bank failures during the GFC.  The problems at the banks that went under a year ago had to do with interest rates, and also crypto.  So if this were a similar crisis where things were cascading out of control, like foreclosures and bank failures did continuously from 2008 to 2012 or so,, I think we would know that by now.

This is an indicator of recovery, not crisis, I think.

Hedge funds bet on U.S. real estate rebound

Quote

Hedge funds piled into long positions on U.S. real estate investment stocks in the week ending Friday, the sixth straight week that these speculators bet on a rebound in commercial and industrial properties, a Goldman Sachs note said.