How Trump’s Ex-Treasury Chief Landed 2024’s Highest-Profile US Bank Deal

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(Bloomberg) — Three years after Steve Mnuchin finished his term as Donald Trump’s Treasury secretary and raised cash from overseas investors, the financier and an old ally are dusting off their playbook for mining profits from a struggling US bank.

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Mnuchin’s Liberty Strategic Capital led a group of investors that injected more than $1 billion into New York Community Bancorp while effectively taking control of the ailing lender to apartment landlords. The deal, announced Wednesday, installed former Comptroller of the Currency Joseph Otting as chief executive officer.

The intervention sent the troubled lender’s stock soaring, giving their coalition an instant paper profit and a shot at earning billions more.

“The capital infusion couldn’t have been more timely,” said Gary Townsend, founder of family office GBT Capital Management. Otting’s appointment “provides some regulatory bulletproofing,” he said, adding that it “never hurts to have the backing of a former Treasury secretary.”

It’s another reunion of the duo with a track record of stirring up controversy as they chase returns. Before their posts in Trump’s administration, Mnuchin led an investor group that bought failed mortgage lender IndyMac after the 2008 financial crisis and, rebranding it OneWest, installed Otting as CEO. By the time they cashed out at more than double their purchase price, the lender was beset with accusations it had hurt communities as a “foreclosure machine.”

Mnuchin, 61, later irked his critics again after leaving the Treasury and raising money for Liberty from sovereign wealth funds in the Middle East, including Saudi Arabia’s Public Investment Fund.

Now, his firm has landed this year’s highest-profile US regional bank deal.

Unlike IndyMac, which got into trouble making residential mortgages, NYCB’s woes stemmed from financing office buildings and apartment complexes.

The plan is to tone down NYCB’s commercial real estate concentration and make the company look more like its peers, Otting said on a conference call Thursday.

“The right balance sheet for an organization is a third of it being in consumer-related businesses, a third in commercial banking-type relationships and a third of it in real estate,” Otting said. “You can probably see a path for us to head in that direction organizationally, because I think that diversification works well through economic fluctuations.”

The biggest issue with the bank’s loan portfolio is the portion linked to New York office market, Mnuchin said in an interview with CNBC. The former Treasury secretary said that’s unlikely to improve, but it’s a problem they’ve taken into account.

Last week, the lender’s disclosure of “material weaknesses” in its monitoring of loans pushed down its shares and credit ratings even further. As news emerged Wednesday that NYCB was seeking fresh equity, the stock dipped to $1.70 — from more than $13 last year. It was up as much as 16% to $4 early Thursday.

Catching the proverbial knife set up Mnuchin’s firm and the other investors for huge potential windfalls. The group will buy common shares at $2 apiece and get some convertible preferred stock with a conversion price also at $2, to raise $1.05 billion in total. Mnuchin said investors boosted the transaction from an original $700 million infusion. He described his conversations with the Federal Reserve and the Office of the Comptroller of the Currency as “extensive” over the past few days, saying regulators were supportive.

The group will also get warrants with an exercise price of $2.50 per share. Their shares are expected to represent about 41.4% of the total outstanding on a fully diluted basis. NYCB also said it reduced its quarterly dividend to 1 cent per share from 5 cents.

“It’s always a good thing when a troubled bank can raise private capital, averting the risk of failure and FDIC resolution,” said Sheila Bair, the former chair of the Federal Deposit Insurance Corp. “Steven Mnuchin is a savvy investor and Joseph Otting is an experienced bank manager and regulator. This strikes me as great news for NYCB and its depositors.”

The rally in the shares left the investors sitting on paper gains, almost doubling their money before the deal’s completion in coming days. If they manage to bring the share price back to where it was just two months ago, they’d be looking at roughly $5 billion in collective gains.

‘Tough Pill’

Liberty will invest $450 million. Other investors include Hudson Bay Capital at $250 million and Reverence Capital Partners at $200 million. Citadel Global Equities, part of Ken Griffin’s hedge fund empire, is also backing the deal.

Their injection lifted NYCB’s key regulatory capital ratio 10.3%, bringing it in line with similar regional banks with more than $100 billion of assets, known as Category IV institutions. That common equity Tier 1 ratio stood at 9.1% for NYCB at the end of 2023, the lowest among such peers. Still, the bank could eat into that cushion if it has to materially boost provisions again like it did last quarter, and the firm said in a presentation that a $750 million increase to its loan-loss reserve would reduce the capital ratio to 9.6%.

While the deal “massively” dilutes existing stockholders, it may benefit them if Otting succeeds in turning the company around, Bloomberg Intelligence analyst Herman Chan said.

“It’s a tough pill to swallow for the shareholders that were riding it, but it does give them some time to shore up all the issues,” he said. Now, Otting “has got a lot on his to-do list to shore up its capital even more, reduce their exposure to commercial real estate and make sure their employees and customers stay.”

‘Our Brand Is Crisis’

Mnuchin started his career in the early 1980s as a trainee at Salomon Brothers. He went on to spend 17 years at Goldman Sachs Group Inc., where his roles included heading the mortgage department. He eventually left and co-founded hedge fund Dune Capital Management. Over the years he financed Hollywood movies, holding credits for pictures including Wonder Woman, Sully and Our Brand Is Crisis.

Dune led a coalition of investors — including George Soros, hedge fund manager John Paulson and billionaire Michael Dell’s family office — that bought IndyMac in the financial crisis, using billions of dollars’ of government incentives. Rebranded OneWest, the bank sold in 2015.

Mnuchin, Otting and others involved in OneWest have long disputed accusations by community groups that the bank eagerly foreclosed on homeowners eligible for loan modifications or otherwise neglected underserved communities. The buyer, CIT Group Inc., later separately said it discovered an accounting shortfall of $230 million.

Read More: Mnuchin’s Reverse-Mortgage Woes Blemish Record of Treasury Pick

After weathering Senate confirmation, Mnuchin largely stayed out of many of the controversies that embroiled other parts of President Trump’s administration. And when his term was up, he traced the path back to finance worn by predecessors. Hank Paulson, for example, later became executive chair of TPG Rise Climate. And Tim Geithner went on to become president of private equity firm Warburg Pincus, which did its own distressed-bank deal last year, helping fund Banc of California’s takeover of PacWest.

Mnuchin’s Liberty missed out on major opportunities last year as regional banks quaked and collapsed after rising interest rates eroded the value of assets on their balance sheets.

NYCB’s travails, stemming from commercial real estate, may now provide the opening he had been waiting for — if he can turn it around. Past colleagues predict he will.

“There is no better fix-it person in America than Steven Mnuchin,” said Brian Brooks, a former acting comptroller of the currency under Mnuchin, who was also an official at OneWest.

Hudson Bay’s involvement brings another old ally to the table: Allen Puwalski, who will join NYCB’s board. He spent more than a decade at Paulson & Co. earlier in his career, during which time he served as a director of OneWest.

“It’s very normal to have a successful team come back and do it again,” said Janney Montgomery Scott analyst Chris Marinac, who has a buy rating on the stock. “It’s kind of like a second Top Gun or another version of Rocky. People love a sequel.”

–With assistance from Peter Eichenbaum and Paige Smith.

(Adds comments from conference call and CNBC interview starting in ninth paragraph, updates shares in 12th.)

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