Bet on Corruption - Losers Win and Taxpayers Lose

The beleaguered New York Community Bank (NYCB), which had the honor of hoovering up assets from the failed Silicon Valley Bank, then suffered its own brush with failure last week, and now appears on track to avoid being shuttered or sold.  What changed? 

As the Wall Street Journal reports, the newly appointed Executive Chairman Alessandro DiNello stated that they are considering to sell assets and shrink the bank.  This kind of discussion would make one think that the regulators will give them another roll of the dice, with, cough, cough, new management – even though the shareholders remain the same.   

Despite the bad condition of the bank, a negative $8.9 billion cash flow in the quarter ended September 30th, and the market’s very dark view of the current situation reflected by pounding the stock below $5, we can only suspect that the “Prudential Regulators” quietly gave the bank and its large uninsured depositors some good news as yesterday insiders bought shares, and large depositors so far hold strong, which they wouldn’t do knowing a shutdown were imminent or even possible.

Based on SEC filings, company insiders reported purchases of the bank's shares Friday: 

  • CEO, President and Director Thomas Cangemi purchased 11,310 shares
  • Director Peter Schoels purchased 100,000 shares
  • Director David Treadwell purchased 15,000 shares
  • Senior Executive Vice President Lee Matthew Smith purchased 25,000 shares
  • Director Jennifer Whip purchased 5,100 shares
  • Director Alessandro DiNello, the new Executive Chairman, purchased 50,000 shares


Now don’t be fooled – this appears a bit of a circus trick.  When you sum it all up, the total shares amount to 206,410, which when multiplied by an approximation of the average price Friday of $4.40 dollars per share, this cost $908,000.  If the average contribution of these six executives was around $150,000 each, and yet the cash flow burn was 9 billion dollars in the 3rd quarter, then we could call the investment by these executives at best a good faith and symbolic deposit on something they can’t really afford.  

A bank near the edge of failure would not find competitive financing – and would therefore generally decline further without government support.  Investors already view the equity at near zero so there is little room to maneuver.  Hence, the government permitting a roll of the dice would not occur without some assistance or guarantees.  Even with guarantees, moral hazard will rise to a cocaine high as the executives look to improve their meager position – a rough example of moral hazard here -- they are sitting at a blackjack table with a $25 minimum hand and are holding $25.  The shares purchased are no more than call options on an improved outcome if the economy somehow sustains.

It is possible that the sale of non-strategic assets that DiNello spoke of may already be understood as quite favorable; the type of asset purchases and perhaps financing that would help give the bank a real shot.  The shares executives purchased succeeded in creating a touch of upward momentum, then the weekend saved them and now perhaps next week they announce some sort of asset sale and capitalization plan coerced by regulators that sends NYCB substantially higher – pure unfiltered corruption; losers win and taxpayers lose.

Well – this is only a guess, but the point is – betting on corruption in an election year with this administration seems to be a rational idea.  That said, I wouldn’t stay with this or most banks for the long run.  As the Commercial Real Estate crisis picks up steam, things may get rough even after a bailout.

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