Federal Reserve Chairman Jerome Powell punches Treasury Secretary Steven Mnuchin after a House Financial Services Committee hearing on “Oversight of the Pandemic Response of the Department of the Treasury and the Federal Reserve” at the Rayburn House Office Building in Washington, United States on December 2, 2020.
Greg Nash | Reuters
The injection of over 1 billion dollars Community Bank of New York announced Wednesday is the latest example of private equity players waking up to the needs of a wounded American lender.
Led by former Treasury Secretary Steven Mnuchin’s $450 million Liberty Strategic Capital, a group of private investors is pumping new funds into New York City. The move calmed concerns about the bank’s finances, as its shares closed higher Wednesday after a sharp decline earlier in the day.
This cash infusion follows Banc of California’s acquisition of PacWest last year, which was financed with $400 million from Warburg Pincus and Centerbridge Partners. The January merger between FirstSun Capital and HomeStreet also drew $175 million from Wellington Management.
Speed and discretion are key to these transactions, according to advisors on several recent transactions and outside experts. While selling shares in the public markets could theoretically be a cheaper source of capital, it simply isn’t available to most banks right now.
“Public markets are too slow for this type of capital raising,” said Steven Kelly of Yale’s Financial Stability Program. “They’re great if you’re doing an IPO and you’re not in a sensitive environment.”
Additionally, if a bank is known to be actively raising capital before it can close the deal, its shares could face severe pressure and speculation on its balance sheet. That’s what happened to Silicon Valley Bank, whose failure to raise money last year was effectively its death knell.
Around noon on Wednesday, news that NYCB was seeking capital sent its shares tumbling 42% before trading was halted. The stock subsequently rose on news that it had successfully raised the funds.
“This is the unfortunate lesson of SVB,” said one adviser on the NYCB transaction. “With private deals you can talk for a while, and we almost got there before there was any publicity.”
Mnuchin’s reach
According to a person familiar with the matter, Mnuchin contacted the NYCB directly to offer support amid headlines about the duress she was under. Mnuchin is not just a former Treasury secretary; In 2009, he led a group that bought California bank IndyMac out of receivership. He eventually transformed the bank and sold it to CIT Group in 2015.
Now, assuming that Mnuchin and his co-investors have seen NYCB’s deposit levels and balance sheet – and are comfortable with them – the bank has much more time to fix its problems. Last week, the NYCB revealed “material weaknesses” in the way it reviewed its commercial loans and delayed filing a major annual report.
“This buys them a lot of time, it means the FDIC won’t come and seize them on Friday,” Kelly said. “You have a billion dollars in capital and huge backing from someone who has seen the books.”