I discussed New York Community Bank on Looking Backwards Looking Forwards this week and I was all set to write about a different topic, but when the facts change sometimes you have to change your mind and that is what happened to me today. Last Wednesday NYCB was down 38% after posting a huge 4th quarter loss of $252 million and cutting their dividend. Two loans were the driving force behind the losses, and it seemed the contagion of last spring was contained in New York and in two loans in particular. Au Contraire mon frere. There is an old joke about how did that stock fall 75%? It lost 50% of its value and then lost 50% again. As we sit on Tuesday night, the stock was down 22.22% on Tuesday and in the afterhours, it is trading down another 17%. This stock was trading at $10.50 a week ago and is trading at $3.50 today. This is commercial real estate bringing down its first bank, and my guess is that it won’t be the last.
However, this is where I find that it gets very interesting. Reuters reports via US News that the shareholders are suing NYCB. “In a proposed class action filed in Brooklyn federal court, shareholders said the regional bank defrauded them by failing to disclose it would set aside more money for credit losses and cut its dividend 71% to shore up its balance sheet. Led by Tennessee resident Walter Lemm, shareholders accused the 145-year-old bank of having inflated its stock price since last March by offering an “unrealistically positive assessment of the Company and its financial well-being and prospects.”
If you read Matt Levine’s email newsletter, and it might be the best in the world, he always says that everything is securities fraud. If your CEO gets caught for doing drugs and the stock goes down, then it is securities fraud as the CEO had a fiduciary duty to not get caught doing drugs etc. I’m sure Levine will write about this case as well. What did these investors expect the company to do? Have a press conference and announce that the company is going to be losing $252 million. The stock would have fallen just as much then. Every company says positive things and if they don’t, they aren’t CEOs for long because sweet talking a bunch of stockbrokers into buying their stock is the name of the game. Now ZeroHedge is reporting that NYCB’s ratings have been cut to junk status. 33% of their deposits were uninsured and they could face liquidity pressure if there is a loss of depositor confidence. I have been making calls lately, and I am saying this bank is done by Friday and possibly even Thursday. The funds will flow out and two bad loans will have just ruined a top 40 bank. This is happening fast and now everyone is looking around and saying, “Who might be next?”
Ole Walter Lemm from Tennessee got caught. That’s what it sounds like to me. I was going to say on the short end of the stick, but if he was short, he would be making money and not suing so I assume he is long and wrong. This is why this is so fascinating, what happens if the stock market crashes like NYCB, and everyone just sues? I’m sorry, it is not allowed for me to lose money so I will sue, and you will have to pay me back and make me whole and bail me out dammit!!! This was the dying wail heard throughout the 1930’s after the sell off in 1929. What if there is no one to sue, no one to bail them out, and no one to pick up the tab of their one sided, blinded by the Federal put, and non-stop bailouts of the last 40 years of stock market shenanigans. What if it all goes kaput?
Our Jedi Jerome Powell went on 60 minutes on Sunday night, and he managed to say a lot without saying anything. He simply brought up the unsustainable fiscal situation that the government has placed us in. He said it is time to have an adult conversation about it. Brian Moynighan, CEO of Bank of America, came out on Monday and said it is time that Washington looked the problem in the eye. This comes after Jamie Dimon, CEO of JP Morgan Chase, comes out and said that Washington faces a global market rebellion over the record debt and calling it a cliff and we are going 60 mph towards it.
Now my first response was that these three gentlemen are my new listeners here at the CTPC, but then I realized something else must be going on. Why is Jay Powell doing a 60 Minutes interview now? Why are these two backing him up less than 48 hours later? Dare I be so bold as to hope for actual attention being given to the debt problem? Are these three starting to shine a spotlight on the ridiculous legislative and executive branches and saying no more. We cannot take any more debt. There is no one left to buy the bonds! I think they are spot on, but I can’t believe that we are going to turn on a dime and get fiscal religion. But I am very hopeful.
Others that are hopeful are the banks. Circling bank to NYCB, at the bottom of the ZeroHedge article it said something that I have been hearing whispers about for some time now. The article said, “NYCB relies heavily on wholesale funding from the Federal Home Loan Bank of New York.” I have been doing some digging into these Federal Home Loan Banks. They are government sponsored banks that provide liquidity to financial institutions to support housing finance and community investment. Aaron Klein wrote for Brookings.edu one of the reasons for Silicon Valley Bank to fail was a dash for cash to the Federal Home Loan Bank. “As SVB needed cash they used the arcane Federal Home Loan Bank system to borrow heavily becoming the SF FHLB’s top borrower with $20 billion. The FHLB is called the lender of next to last resort, and when a bank fails the FHLB is the only entity that gets paid out ahead of the FDIC. Thus, the more in debt a bank is to the FHLB, the greater the losses born by the taxpayer if the bank fails.”
The Bank Term Lending Program, BTLP, was rolled out by the Fed as a cure for Silicon Valley Bank to the media, but if we look at the chart from the Fed ST Louis website Fred, we can see that FHLB advances went from under $400 billion in Q1 2022 to over $1T in spring of 2023 during the banking crisis. This is criminally underreported, but they are keeping it out of the news. This facility has dropped lending to around $800 billion in Q3 2023 but the next quarterly report should be out soon. How much bailout has been run through the lender of next to last resort? So the taxpayer is on the hook at the FHLB for SVB and now for NYCB as well. How much of this debt is toxic?
If heavy borrowing at these banks is a sign of weakness, don’t we know exactly who might be next? Don’t the regulators know is more appropriate? What these banks need is a rate cut or two to take some pressure off of them and I have bad news. We are running out of season time for this inflation decrease to happen. Remember what inflation is, it is the % change year over year. In June of 22 we had 9.1% inflation and it declined all the way to December to 6.5%. Here we are a year later with June year over year percent change 3% higher than that 9.1% change from the previous year and every month has been higher with 3.4% being the current rate. That is 4 tenths of a percent higher than June, so for 6 months we have not gone any lower. Looking ahead we go from January at 6.4% down to that June 3.0% figure. We have some much easier comps to beat on a year over year basis starting in May at 4.0 and then a bunch of 3% numbers from June until the end of the year. Powell has already said that March is off the table so maybe we get a cut in May or June, but how likely is it to get a rate cut if we are 3-4% higher than last year’s numbers which were in the 3% range. Rate cuts will only come en masse if there is a financial calamity like another regional bank problem. This means that rates could stay higher than expected for longer than expected. I specifically called Powell’s pivot a verbal pivot and reminded everyone that he hasn’t cut rates yet. Will NYCB be another spark threatening to reignite the banking crisis? We shall see.
Before we wrap up this week, I want to pause and remember a fine American that passed away this week. Toby Keith had 20 number one hits but despite being a celebrity he was one of the most relatable stars because of his upbringing. He worked in the oil fields, he played semi-pro football, and he struggled for a long time as a musician before he made it as a top selling artist when his song “Should’ve been a Cowboy” went number 1. His patriotic hit “Courtesy of the Red, White and Blue (The Angry American) seemed to epitomize a large part of America after 9/11 and it polarized another large section of the country. Keith didn’t care and was steadfast in his patriotism and his concerts played up the patriotic fervor only enhancing his appeal. Toby Keith was a man of backbone who stood up for what he believed in, he was a patriot, and he was a songwriter. Rest in Peace.
Sincerely Yours,
C Thomas Printer
On this date in history… 60 years ago to be exact, the British Invasion began when the Beatles first appeared on the Ed Sullivan Show drawing 73 million viewers.
Also born on this date… a former teenaged blacksmith’s apprentice, John Deere.
Thank you for listening today and you can find all of our articles and more on our website cthomasprinter.com.