The news that troubled New York Community Bancorp (NYCB) has secured the help of powerful investment firms and appointed a new CEO brought relief to many in the markets who feared that the financial institution might go the way of Silicon Valley Bank, Signature Bank, Credit Suisse, and other once-powerful players that have collapsed in recent years.
NYCB announced that Liberty Strategic Capital, Hudson Bay Capital, Citadel Global Equities, and other investment firms had agreed to commit to a total equity investment of $1 billion. After news of the deal broke, NYCB’s shares, which had fallen by double digits in the days prior, rebounded by nearly 30 percent.
Liberty Strategic Capital is a Washington-based private equity firm under the management of Steven Mnuchin, who served as Treasury secretary under former President Donald Trump.
The bank also announced the replacement of short-term interim head Alessandro DiNello with a new CEO, Joseph Otting, who had served as President Trump’s comptroller of the currency.
So, at least in the short term, NYCB looks likely to avoid the fate of such rivals as Signature Bank, which NYCB’s own Flagstar Bank subsidiary acquired almost a year ago, on March 19, 2023, and Silicon Valley Bank, which became part of First Citizens Bank & Trust Company’s subsidiary, First Citizens BancShares, on March 27, 2023.
But an overleveraged financial institution, depending heavily on the equity investment of powerful asset managers to survive, isn’t operating a sound and sustainable business model. The new arrangement doesn’t come close to solving the deep internal problems of NYCB or to avoiding further turmoil in the banking industry. While $1 billion sounds to some people like a lot of money, it will prove of limited utility in the long term for a bank that has grown severely overextended, not to say amorphous, much like certain Chinese conglomerates.
That’s the view of Jeffrey Hooke, a senior lecturer at Johns Hopkins Carey School of Business in Maryland and former vice president in the investment banking division of Lehman Brothers.
“I think that to stay solvent, the bank has to start shedding assets very quickly. It was overextended. The fact that the bank did two giant acquisitions in 18 months put a strain on the balance sheet,” Mr. Hooke told The Epoch Times.
Too Far, Too Fast
Flagstar’s incorporation of Signature Bank came barely four months after the completion of NYCB’s all-stock merger with Flagstar on Dec. 1, 2022. When Flagstar acquired Signature Bank in March 2023, it barely broke even. The acquirer gained assets worth $38 billion but also took on some $36 billion in liabilities, in the form of $34 billion worth of deposits and various other debts and obligations.In Mr. Hooke’s view, the rapid-fire acquisitions signify a strategy of growing aggressively with little rhyme or reason. In common parlance, NYCB’s managers have bitten off more than they can chew—particularly when one considers the radically different areas of focus of the two banks recently brought into NYCB’s fold.
Flagstar Bank is one of the nation’s most active residential mortgage lenders, while Signature Bank was deeply involved in cryptocurrency.
“With Flagstar Bank and Signature Bank, you’re getting into different areas. I don’t think that the management gave themselves enough time to absorb Flagstar and Signature,” Mr. Hooke said.
He conceded that with its heavy volume of insured deposits, NYCB isn’t in quite as precarious a position as certain banks and cryptocurrency exchanges, such as FTX, that have imploded and left former executives on the hook for the hundreds of millions of dollars that uninsured depositors were unable to recoup.
“NYCB has more retail deposits that are insured, so the possibility of a run on the bank is less than in the other cases. But people are tempted to run if they see any crack in the façade of a bank. A billion dollars, in the context of a hundred-billion-dollar bank, that’s simply not that much money,” Mr. Hooke said.
The Chinese Example
Comparisons between NYCB and such unwieldly, overleveraged Chinese conglomerates as Evergrande and Zhongzhi Enterprise Group Co. aren’t farfetched, Mr. Hooke saysIn the view of many observers, the troubles of the two firms, originally devoted to real estate and shadow banking, respectively, became acute when they began to branch out into areas where they had relatively little experience.
None of these developments should be lost on U.S. banking executives, but judging from NYCB’s roller-coaster ride, it’s unclear how much attention, if any, they have paid.
“In the context of NYCB, you’ve got some similarities, because here you had a New York-centric bank, and then they go off and make acquisitions, and they’re obviously going into areas where they weren’t so experienced,” Mr. Hooke said.
The German Example
Yet another parallel with NYCB’s strategy of rapid and heedless expansion is evident in the troubles that Germany’s largest bank, Deutsche Bank, has experienced since completing its $6.3 billion acquisition of Postbank in 2012.In July 2023, Deutsche Bank proudly announced the successful transfer of 12 million Postbank customers to its own IT systems and services, only to meet a barrage of complaints from those customers, citing lapses in service and lack of response from bank representatives.
The situation quickly grew so dire that in October 2023, BaFin, Germany’s financial regulator, stepped in and appointed a monitor to oversee how Deutsche Bank addressed customers’ concerns.
Bank executives make a mistake when they treat mergers and acquisitions within their sector as more or less analogous to non-bank companies’ expansion, Mr. Hooke said.
“I think banking is more complicated than two industrial companies merging,” he said, alluding to the highly specialized areas of finance in which banks find themselves when they acquire another player in a space broadly, if not nebulously, defined as “financial services.”
NYCB officials didn’t respond by press time to a request by The Epoch Times for comment.
