Federal Reserve Chairman Jerome Powell fist-bumps former Treasury Secretary Steven Mnuchin after a House Financial Services Committee hearing on “Oversight of the Treasury and the Federal Reserve's Pandemic Response” at the Rayburn House Office Building in Washington, D.C., on December 2, 2020.
Greg Nash | Reuters
An injection of an additional billion dollars Community Bank of New York The announcement Wednesday is the latest example of private equity firms starting to need a wounded American lender.
Led by $450 million from former Treasury Secretary Steven Mnuchin's firm Liberty Strategic Capital, a group of private investors is pumping new money into the New York Mercantile Bank. The move calmed concerns about the bank's financial condition, as its shares closed higher on Wednesday after a sharp decline earlier in the day.
This cash infusion comes on the heels of Bank of California's acquisition of PacWest last year, which was backed by $400 million from Warburg Pincus and Centerbridge Partners. The January merger between FirstSun Capital and HomeStreet also netted Wellington Management $175 million.
Speed and discretion are key to these deals, according to several recent deal advisors and outside experts. While selling shares on public markets could theoretically be a cheaper source of capital, it is simply not available to most banks at the moment.
“Public markets are too slow for this kind of capital raising,” said Stephen Kelly of the Yale Program on Financial Stability. “It's great if you're doing an IPO and you're not in a sensitive environment.”
Furthermore, if a bank is known to be actively raising capital before it can close a deal, its stock could face intense pressure and speculation on its balance sheet. This happened to Silicon Valley Bank, whose failure to raise funding last year was effectively a death knell.
On Wednesday, afternoon headlines that the New York central bank was seeking capital sent its shares down 42% before trading was halted. The stock then rose on news of its successful fundraising.
“This is the unfortunate lesson from SVB,” one advisor to the NYCB deal said. “With private deals, you can talk for a while, and we were almost at the finish line before there was any publicity.”
Mnuchin continues
Mnuchin reached out to the Bank of New York directly to offer support amid headlines about the coercion he faced, according to a person familiar with the matter. Mnuchin is not just a former Treasury Secretary. In 2009, he led a group that bought California's IndyMac Bank 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 — and are comfortable with — the New York central bank's deposit levels and capital position, the bank has more time to solve its problems. Last week, New York Commercial Bank revealed “material weaknesses” in the way it reviewed its business loans and delayed filing a key annual report.
“This saves them a lot of time. It means the FDIC won't come to seize it on Friday,” Kelly said. “You have a billion dollars in capital and a lot of endorsement from someone who has seen the books.”
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