New York Community Bank Gets A Lifeline… And Heavy Costs For Weight-Loss Drugs 3/6/24

0:01Live from the Nasdaq market site in the heart of New York City's Times Square this is fast money Here's what's on tap tonight. Back from the brink, New York Community Bank Corp getting a billion-dollar lifeline from the former Treasury Secretary Steven Mnuchin one year after SVB failed. How did another major bank almost blow up? We'll have the very latest. Plus, the battle over bulge. Former FDA Commissioner Scott Gottlieb set to weigh in on the call for the government to step in and get prices lowered for these wildly popular and effective obesity drugs. And later, Tim is pumping up the L in his blicep trade.

0:32Blicep. playing that, topping the tape on a big Chinese tech name. And two left beats, the reasons why Foot Locker dropped almost 30 percent today. I'm Melissa Lee. Come to you live from Studio B at the Nasdaq on the desk tonight. Tim Seymour, Karen Feinemann, Steve Rosso, and Savita Subramanian, head of U.S. equity strategy for Bank of America, B of A. Markets, meantime, managing gains across the board as investors look to recoup some of yesterday's losses, though all three indices did close well off the day's highs. Fed chair Jerome Powell reiterating that the central bank is not ready to cut rates just yet.

1:03We'll get more on that in just a few minutes. But we start off with a last-minute lifeline for New York Community Bancorp. Shares were down as much as 42 percent today before the regional lender announced it had secured a billion-dollar investment led by the firm of former Treasury Secretary Steven Mnuchin. After several trading halts, shares managed to close the day higher, 7.5 percent. That is less than 25 cents higher, I should say. For the latest details. Let's get straight to Leslie Picker, who joins us here on set. What a rollercoaster day today. Oh, my gosh. It was a fascinating turn of events for this company, New York Community Bancorp, inking a deal for$1 billion from a group of investors led by former Treasury Secretary Steven Mnuchin's firm Liberty Strategic Capital.

1:45Those investors buying common and convertible preferred stock,$2 per share. Investors will also get a 60 % warrant coverage to buy more stock with an exercise price of$250. A bit of background on how this all came together, according to people familiar with the matter. Secretary Mnuchin had been involved here diligencing NYCB for a while now. I'm told Jeffries approached a select group of other investors with the prospect of a capital raise on Sunday. They were told that a lead investor, Mnuchin's firm, had put up$450 million. Ultimately, investors including Hudson Bay Capital, Reverence Capital Partners, and Citadel had had decided to invest alongside him for a total infusion of that$1 billion.

2:27I'm told that putting former comptroller of the currency, Joseph Otting, in the CEO role and revamping the board was a boost of confidence for investors to join in here. The price per share of$2 was finalized intraday after the stock plummeted. It's a premium to the lows of today, but below any level that NYCB has closed since the late 90s. Still, the stock is reacting positively because investors believe that the equity stabilizes the bank, whereas the stock moves prior to this announcement were more reflective of a likelihood of failure. Melissa? I think Mnuchin stepping in is a really interesting twist given his track record bailing out IndyMac during the great financial crisis.

3:09At the time, that was the third biggest failure amongst banks in U.S. history. And I guess there's sort of a dance being done in terms of when to step in, how far do you let New York Community Bancorp fall? and whether or not you just wait until it does. If you're a public market investor, there's just been such a slew of headlines surrounding this company. It was just last week where they revealed their material weaknesses and internal controls related to loan review. That review is ongoing. So there's been this sense among the investor community of what could pop up next. And that's been the main concern and why they've really struggled to find stability here.

3:43They did have a couple weeks of stability. You saw some insider buys. It seemed like things were kind of under control. But now there's just so much uncertainty. So what today's news showed, and I think that's why you saw the stock close up a decent amount today, is that, you know, you have this new management team in place, a management team that is very familiar with the regulatory environment, which is extremely important as this company is now over$100 billion in assets. So regulated much more strictly than they were back in 2022. You've been pouring over this. Yeah, I find the whole thing.

4:18It is fascinating. I think, you know, Leslie's talking about the fear of failure. I think we were hours from failure, less than one day from failure. I don't think that the stock could have opened again tomorrow without there having been something cataclysmic. So interesting timing for them to price a an equity offering and a convert and the warrants. But I imagine that NYCB had absolutely zero negotiating leverage. None. So this is very good. There's life for the bank. It was trading as if it was an option that was about to expire. So now there's life to the option. I don't know that it addresses some of the other issues.

4:58So we know that they had this goodwill of$2.4 billion. This is going back to last week. All of a sudden they're saying, all right, you know what? That goodwill should be worth zero. Now, that doesn't actually affect the tangible book value, But it does raise questions of why have you never looked to write down that goodwill before now? I don't know. Maybe it had to do with them talking to Mnuchin and others. It's fascinating. It's good that they're getting new management, particularly after that crazy ride last week where we saw the head of the board step down and say in protest. I don't think he should be our guy, which you brought up the point.

5:34Maybe it was because some of the things they bought under Flagstar. I don't know. The goodwill didn't change between before Flagstar and after. It didn't change much between when they did the signature deal. So I don't know what the disclosure hasn't been fantastic. So, yeah. And I also would imagine they were calling Jamie Dimon and he was like, no, I am not taking this call. No, you point out the disclosure aspect. And there's this sense of mistrust among the investor community because, remember, they lost their head of risk and their head of audit back in December. it was never disclosed. They just kind of disappeared from the website.

6:10And then suddenly media reports showed that those two individuals had departed. It took a few weeks to fill those roles. It was reminiscent of SVB. Yes, exactly. And that's why I think when headlines hit the wires earlier today saying that they were looking for equity capital, a lot of people had this deja vu sense of, oh, that's what happened with SVB. And they went under and therefore the stock plummeted more than 40 percent on those headlines when that deal was actually solidified. They saw that it was a billion dollars led by Mnuchin's firm and some other heavyweight investors. The stock rebounded and people felt more comfortable.

6:45And it's that history that almost makes you wonder if I think you're referring to this, Karen, when did they really know about this two point four billion impairment? Was Mnuchin already looking over the books? Did he say, hey, I can get involved here, but you've got some work to do before we do that? And obviously they were in a really difficult place. The thing that's also just interesting to read headlines when you hear announcements from the new team and the investors saying, we actually now feel that New York Community Bank has enough reserves to deal with provisions and parts of the existing portfolio.

7:16I don't know how you do that. I mean, in other words, I think there's some dynamics out there. We talked about the idiosyncratic dynamic of New York Community Bank and why, in some sense, this isn't the whole sector, but that they have significant issues in terms of buildings that they own in New York or they've lent against, excuse me, that have significant rent controls around them. There's a lot of different dynamics with their loan portfolio that I'm not so sure right now, given the concerns that are happening, that you can say, hey, we think we're not only good here, but we're good to be able to deal with additional capital reserves.

7:46Fascinating that the KRE closes flat on the day. And if anything, over the last couple of days is in an upswing. And so that's telling you that the market is saying this is NYCB specific. Also, Fed Powell today made a reference to commercial real estate, and he said, we kind of think it's manageable. That was a great day to say it if you're NYCB trying to get this deal done. Yeah. You know, it's interesting, though, that the problem was they became too big and all of a sudden we're under the regulatory crosshair. So I wonder if this rattles investors' faith in small caps, because, you know, when you think about it, it was doing just fine until it reached a threshold of market cap and, you know, assets that triggered more regulation.

8:30So I just find this all so interesting. But are you saying they were doing just fine or no one knew how not fine they were doing? I suppose you could say it either way. But it makes you wonder, you know, OK, what about the rest of the regionals or the smaller banks? Right. Who was looking at the loan portfolio? I mean, it's not like it was an unknown that they had a large percentage of loans that were tied to rent controlled property. The regulator forced that deal. It was when the law was passed. We knew that rates were rising for a very long time. The most well telegraphed rate hiking cycle in the history of man.

9:04Is that in the model? Would you expect that? There's obviously it wasn't. Right. So we keep expecting these things to all be in the model. So now we flagged another one. That'll be put in to the next model. But the question is, who else hasn't put that in the model? What else hasn't been accounted for? Well, once that happens, the market will trade off of it. My understanding is that there was almost this kind of regulatory awakening when they crossed that$100 billion threshold. Suddenly, they were feeling pressure from the OCC, which hadn't historically regulated them as closely. And so the way that they were treating these loans, I think they expected more of a phase-in period after they acquired the signature assets, that they could kind of phase in some of these criticized loans, that it was more of a, you know, okay, well, we did this deal for you guys, so give us a grace period to work this through our books.

9:53And then the OCC came in there and was like, no, no, you have to criticize these now. These need to be reflective of a$100 billion bank. There is no phase-in period. You are over this threshold. you need to be acting like it. And so I think that was where the big surprise came in in the fourth quarter. They had to take more reserves as a result, slash the dividend. And so it was kind of this almost like a misunderstanding with their regulators on to what they expected following these large acquisitions. Which also does not instill confidence. Right. Right. Exactly. Which kind of feeds into the whole narrative here.

10:28Leslie, thank you so much. Leslie Picker, keeping us abreast of all the developments here. For more on what New York Community Bank Corp's lifeline means for the battered stock, let's bring in Chris McGrady, head of bank research at KBW, a Stiefel company. Chris has a market perform rating on the stock and outperformed not too, too long ago. And Chris, I want to just start off with where where we left it. You know, if New York Community Bank Corp had never acquired the assets of a signature, would we have known about, you know, the problems within their loan portfolio? Sure. Thanks, Melissa. So the problems in the loan portfolio really come down to concentration, right?

11:05New York community has been a concentrated business model in New York City, in multifamily apartment buildings forever. That's not new. The signature deal and the Flagstar deal a year ago actually made them less concentrated, still concentrated, but less so. Really, the issue is they crossed the hundred billion dollar level. and the OCC, while their prior previously were the regulator, we believe the scrutiny got turned up after the deal. And certainly this phase in period did not happen. So was that your when when the bank announced that it was acquiring those assets, did you think that there was a phase in period?

11:42I'm wondering how there is a misunderstanding about that when when you're buying assets and it's a deal that's blessed by the FDIC. We all did. Yeah, we actually upgraded the stock to outperform that night. We thought at$6, given the stock and given the capital relief, this was a great deal. We thought while the company had earnings challenges they were working through, diversification was moving in the right direction. So the phase-in period didn't happen. And certainly we didn't see this. We stepped away from the stock in December, but we certainly didn't see the speed of which this happened transpiring.

12:16So Chris, it's Karen. Thanks for being on today. So you have a buy on the stock. What is it? How do you model this? What are you hoping they achieve? What are you basing? What kind of metrics are you looking for here? No, just to be clear, we were birated last year. We stepped away in December. So we're market weight, the stock. Really, what we're going through, Karen, is we're trying to figure out with all the dilution that happened today. What is the normalized return on equity for the company? The stock closed at roughly 50 % of pro forma tangible book. And that would suggest the market's thinking an ROE in the 5 % to 6 % range is about right.

12:52We're hearing and we're talking to investors a lot about this reminds us of Citigroup from 2008 and the dilution. So the earnings power has certainly been diminished. There is earnings in this company. It's going to take time to come out. And I think today was the capital raise. But going forward, they're not done. They're going to sell assets. They're going to consider securitizations. Those were ideally going to be the first moves the company was going to make after earnings. The market forced their hand to do the equity race first. But clearly, we're trying to estimate what the earnings power.

13:22And it's probably a five to six, are we? Hey, Chris, it's Tim. So who's next? Because you can't tell me that idiosyncratic. I know the New York rent control market's difficult. We can all paint that picture. But it was a year ago that was SVB. It was held in maturity securities and a quick flight of capital that made that a problem. There's some issues out there. And it just seems to me that there are a lot of people that may be over their skis. Right. Commercial real estate's a big asset class, right? It's 40 percent roughly of a small bank's balance sheet. So the smaller banks, Tim, have more CRE.

13:56So that's where we're spending the focus. And they have lower reserves. So the incremental earnings pressure is going to be felt for the small banks. But if you step back, today was a big step in the right direction for the industry. Confidence has been really, really low. I think investors had feared this was going to be a zero for shareholders. And clearly, right now, that's not the case. So we are still thinking about what the normalized impact from credit is. But we don't think there's going to be a systemic concern from here. We've had a year. We're almost at a one-year anniversary of SVB.

14:25The industry's liquidity and deposit levels look very, very strong. There are earnings pressures, but systemic, we don't buy into that. All right. Chris, got to let you go. Thank you so much. Great. Thank you. Chris McGrady of KBW, what do you see on this? So when you look back on the issues that we had last year and when things were called a bailout, usually when you have a bailout, you buy the stock and the stock rallies. We didn't see that last year. We saw floods of money coming into money center banks to a J.P. Morgan, because they were the one that was solving the problem. Now you have another bailout.

15:03So for me, there's plenty of others that are going to be out there. The market's a pretty efficient place. They'll sell the ones that have the same issues. But if you're looking to buy the equity, where do you think it's going to go? The last spring taught us that the equity didn't go anywhere. Look back on some of these names that were troubled back then. The equity didn't go anywhere. Look back on some of the other names. They never got as high as they were before they sold off. So all this tells me is buy J.P. Morgan. I mean, I think that I kind of agree on the large over small argument. I mean, I think this just bolsters the idea that at least you know exactly what the large banks are doing.

15:45They know what the regulatory landscape looks like. They're, you know, potentially lower earnings risk than they have been historically lower leverage. But I don't know. I think about, you know, real estate back in 2009 and it felt similar. It was the idea that, you know, these companies needed to raise equity. And when they did, they sort of got a lifeline and they bounced a little bit. But then they just kind of remained dead money for a very long period of time. And I wonder if that's the path for for regionals. I mean, I think that what's interesting is you need a lender for the economy. and the only area of the economy that hasn't been allowed to lend are the big regulated banks.

16:25So I think this is an environment where, you know, you could potentially see that shift. Right. Did you actually put on the trade that we talked about this afternoon? I did. You did. And then I almost took it off, but I didn't, which was, Melissa and I were talking this afternoon about this before the Mnuchin thing, and I'm like, ooh, this looks really bad. I'm going to short some KRE. And then you text me the Mnuchin thing. I'm like, I'm going to look to cover. And then I'm like, you know what? I'm not going to look to cover because this isn't great. Right. And I thought, oh, should I do a KRE XLF kind of trade?

16:57I'm in your camp. I think to the beneficiary of this kind of disruption is the big money center banks. Right. Right. And also we got word from Powell today that they're reexamining the capital plans. Yeah. Big boost for the big banks. There's no question. And we thought one year ago that the big banks were had their hands tied once again. And I think it was at a time when actually the banks were starting to have a lot more freedom on their capital. I guess I agree with that. I mean, I look at what everybody's saying here. First of all, if you look at the BKX, so the large cap bank, essentially, you know, you double bottomed at 70 on the charts.

17:30You're up 40 percent off of that market inflection and you're now actually breaking out. And you're breaking out at a time when we are seeing some of the broader dynamics. It's great to have Savita back because I think she even talked about some of the old economy stocks that were going to benefit from the efficiencies of AI. And you're seeing this where people are willing to. It's easy to poo poo that the EPS growth has been disappointing, but the margin dynamics have been pretty impressive. All right. Meantime, Fed Chair Jerome Powell also saying in his testimony today that he is confident inflation will continue to move lower, but that more data is needed before the Fed can start cutting rates.

18:04Long-term Treasury yields were lower on the day, with the 10-year touching its lowest since February 7th. Let's bring in Paul McCulley, an adjunct professor at Georgetown's McDonough School and former PIMCO chief economist. Paul, always great to see you. Good to see you. Did we learn anything new from Powell in terms of the trajectory of rate cuts and or the landing point, the end point? No, I don't think we learned anything new today. We did get confidence that we heard right back at the last presser and also in his 60 Minutes interview that the tightening cycle's over. He did a valedictory on that.

18:42An easing cycle is going to come. He's warm and fuzzy about that. But he's not urgent about starting the easing process. And I think there are a couple reasons. One, the economy is still quite resilient, if not strong. And I think he agrees with that. And we also have the financial markets quite exuberant. So both of those factors say later, not sooner. But it's a done deal that we're going to get an easing cycle. And June seems to be a date that works for the market, works for me. I think it'll work for the Fed. Hoya Saxa, Professor McCauley from Hoya. I think you have an argument that the Fed's overly restrictive, but it's OK.

19:32How about the offset of the financial conditions out there being remarkably easy? Is that making it an OK environment for the Fed to hang in there longer? And I realize we don't know what the tail is and what the dog is. But if equities were doing something different, would you be more worried about the economy than you are today? I'm not sure if I'd be more worried about the economy because I think the equity market really is betting on the easing game. And it does ease financial conditions along with the other components of financial conditions. And that supports the economy. And on one side, that gives the Fed time because the financial markets are already stimulating or supporting the economy.

20:17On the flip side, it requires the Fed to ease in the fullness of time to validate what the market has done. Or if you want to put it very simply, ultimately, the Fed's got to re-slope the yield curve. An inverted yield curve with easier financial conditions is not a completed project. You ultimately have to have a re-slope yield curve. The Fed has to validate it. And assuming that they do, then we will have the soft landing scenario. Paul, what's going to be the tell? For me, it's they can't do QT and be cutting rates at the same time. There's too much push-pull there. So once we see them end QT, that gives me the sign that the next go-around is the cut.

21:09Do you agree or why don't you agree? I actually disagree with that. I think that QT and the policy rate are separate variables. They're separate tools. And I don't think there's any impediment whatsoever to the Fed starting the easing process and continuing QE to QT. And I think QT is going to be tapered maybe even in March, but certainly this spring, so as that they're not at the pace that they've been for the last 18 months. Paul, thanks for joining us. Always great to see you. Paul McCulley, AgDunner Professor at Georgetown now. So, Savita, what'd you make of today's test? Does it change anything?

21:55You're already getting more bullish on the markets. I am, yeah. I mean, I feel pretty good about markets. I think, you know, we've written a lot about how the bear cases that we hear don't necessarily hold water. So, you know, the idea that the market's too expensive. Well, if you compare the S &P today to the S &P in 1980, yeah, it looks more expensive, but it's a completely different animal. It's got, you know, 50 % of it is asset light versus 30 years ago, it was more manufacturing. I think, though, what's interesting, just from listening to the professor, is the idea that we're not going to see another Fed hike.

22:35So I think that could be the bearish scenario. But there is one. I mean, just, you know, inflation, is it under control? Maybe it comes back a little bit. And if we did see another Fed rate hike, I don't think that would be so terrible. What's another 25 basis points? There's, you know, cash rich investors would make more money on their cash. Tech companies are net cash positive. It would probably be OK from a fundamental perspective. But I just wonder if that's completely off the table. I wonder if it's off the table, both a cut and a raise, just because of the political environment. Right, exactly.

23:10Whether or not the data supports one of those doesn't matter. We kind of hope it, right, as a citizen. I mean, we have this independent central bank that we don't want to be. So they may not do what they need to do just to show they're independent. But no, we've got three cuts. We've got three cuts baked in. I agree. Yeah. Coming up, a check on China Tech. Shares of JD.com surging after earnings in the broader Chinese internet space is jumping along with it. How to trade these names next. And we are stepping back on the scale to hit the weight loss drug race. How rising costs could impact those in need and how the government could step in.

23:43More on that when Fast Money returns. This is Fast Money with Melissa Lee. Right here on CNBC.

23:59Welcome back to Fast Money. JD.com topping the tape today, having its best day in almost two years. The Chinese e-commerce company surging more than 16 percent after posting a beat in the top and the bottom lines. Revenues in the latest quarter rose 3.6 percent from a year ago. The company also announcing a three billion dollar share buyback. There's so many concerns about the competitive threats, which they did seem to acknowledge in some respects, but specifically from PDD, which is the owner of Timu, Shop Like a Billionaire. It's very competitive. And so if you think about that environment, the question is if you're investing in Chinese e-commerce names and even Internet companies more broadly based upon fundamentals or not.