Finance

The S&P 500 has climbed for 16 of the last 18 weeks and closed at a new all-time high on Friday, but the gains have been heavily concentrated amongst the so-called “Magnificent 7.”
Despite comparisons with the market conditions of the late 90s, before the burst of the dotcom bubble, UBS strategists say “there’s no bubble ready to go pop.”
TS Lombard, meanwhile, says the current bull market is missing one crucial ingredient required to be deemed a bubble.

Traders work on the floor during morning trading at the New York Stock Exchange on March 6, 2024.
Spencer Platt | Getty Images

Despite the heavy concentration of the U.S. market rally in expensive, AI-focused tech stocks, analysts say Wall Street is not yet in bubble territory.
The S&P 500 has climbed for 16 of the last 18 weeks and notched a new all-time closing high on Friday, but the gains have been heavily concentrated among the so-called “Magnificent 7” tech behemoths, led by skyrocketing Nvidia.

The U.S. Federal Reserve, meanwhile, is expected to begin cutting interest rates in June, potentially supplying a further boon to high-growth tech stocks.
The sheer scale and narrow nature of the bull run have evoked some concern about a market bubble, and UBS strategists on Wednesday drew comparisons with the late 1990s.
In January 1995, when the Fed finished a cycle of interest rate hikes that took the Fed funds rate to 6%, the S&P 500 started on a bull run that delivered over 27% in annualized returns over the next five-plus years.
Until the bubble burst spectacularly in March 2000.
“The 90s bull run saw two phases: a broad, steady climb from early ’95 to mid ’98, and then a narrower, more explosive phase from late ’98 to early ’00,” UBS Chief Strategist Bhanu Baweja and his team said in the research note.

“Today’s sectoral patterns, narrowness, correlations, are similar to the second phase of the market; valuations are not far off either.”
Yet despite the surface-level similarities, Baweja argued that “there’s no bubble ready to go pop,” and pointed to notable differences in earnings, realized margins, free cash flow, IPO and M&A activity, as well as signals from options markets.
While sector-specific enthusiasm is evident today, UBS highlighted that it is not based solely on hype as was the case for much of the dotcom bubble, but on actual shareholder returns.
The missing ingredient
The top 10 companies in the S&P 500 account for around 34% of the index’s total market cap, TS Lombard highlighted in a research note Monday.
The research firm argued this concentration is warranted given the stellar earnings of these firms.
“However, it does mean that it is hard for the overall index to rally significantly without the participation of the Tech sector, and it also means that the index is vulnerable to the risks idiosyncratic to these companies,” said Skylar Montgomery Koning, senior global macro strategist at TS Lombard.
Yet the Fed’s dovish pivot and resilient economic growth in recent months have enabled stock market breadth to improve, both in terms of sectors and geography, with both European and Japanese indexes hitting all-time highs over recent weeks.
What’s more, Montgomery Koning argued that the equity gains thus far are justified by fundamentals, namely the policy and growth outlook, along with a strong fourth-quarter earnings season.

She said that every stock market bubble needs three ingredients to inflate: a solid fundamental story, a compelling narrative for future growth, and liquidity, leverage or both. While the AI-driven bull run meets the first two criteria, Montgomery Koning said the third appears to be lacking.
“Liquidity is still ample, but leverage is not yet at worrying levels. QT has not resulted in shrinking liquidity in the US so far, as reverse repos (which absorb reserves) declined faster than the balance sheet. In fact, liquidity has been increasing somewhat since the start of last year (there is a risk that 2024 Fed cuts will add to the froth),” she said.
“But leverage doesn’t look worrying; margin debt and options open interest suggest that it’s not speculation driving the rally. There has been a small rise in margin debt but nowhere near the highs of 2020.”
The bad news?
The absence of a bubble does not necessarily imply that the market will continue to rise, UBS pointed out, with Baweja noting that productivity growth looks “nothing like it did in the 1990s.”
“Sure, this can change, but data today on electronics and info tech orders, capex intentions and actual capex doesn’t at all suggest the capital deepening associated with a productivity boost,” he said.
“Our metric of globalisation shows it is stalled (weakening, actually) compared to the late 1990s, when it grew the fastest. The economy is late cycle today.”
The current configuration of the economy is closest to that seen at the end of the 90s bull run and into early 2000, UBS believes, with real disposable income growth “weak and likely to get weaker. Baweja suggested that these variables need to start looking rosier in order for the bull run to persist sustainably. More

You could spot a fake a mile off. The plasticky “Prado” wallets arranged on bedsheets on the pavements lining Canal Street in New York bore only a passing resemblance to the ones for sale in the Prada store in Soho. The fake Chanel bags they lay next to were lumpy, misshapen and smelled a little like petrol. An attempt to make a quick buck by buying one and passing it off as genuine—perhaps by taking it to a small local consignment store—would have been met with raised eyebrows and a chuckle.What an innocent time. Now booming demand, technological improvements and sheer opportunism have transformed the market for buying and selling luxury bags. lvmh, a luxury conglomerate, sold about €10bn-worth ($13bn) of leather goods in 2013. By 2023 it was selling €42bn-worth—a 320% increase in just ten years. (The global economy, by contrast, grew by only 30%.) Dedicated reselling platforms, such as the RealReal and Vestiaire Collective, have expanded rapidly. Revenues from reselling luxury bags and clothing now add up to around $200bn a year. So producers of counterfeits have upped their game, too. Women now gather in Reddit groups to “QC” (quality check) bags they order from China via WeChat. Called “superfakes” by the New York Times, such dupes are often spot on—down to having the correct number of stitches on each side of the classic Chanel quilted diamond (up to 11, apparently). They cost about a tenth of the regular price. More

Hire a wealth manager, and one of their first tasks will be to work out your attitude to risk. If you are not sure exactly what this means, the questions are unlikely to help. They range from the inane (“How do you think a friend who knows you well would describe your attitude to taking financial risks?”) to the baffling (“Many television programmes now have a welter of fast whizzing images. Do you find these a) interesting; b) irritating; or c) amusing but they distract from the message of the programme?”). This is not necessarily a sign that your new adviser is destined to annoy you. Instead, it hints at something fundamental. Risk sits at the heart of financial markets. But trying to pin down precisely what it is, let alone how much of it you want and which investment choices should follow, can be maddening.To get around this, most investors instead think about volatility, which has the advantage of being much easier to define and measure. Volatility describes the spread of outcomes in a bell-curve-like probability distribution. Outcomes close to the centre are always the most likely; volatility determines how wide a range counts as “close”. High volatility also raises the chances of getting an extreme result: in investment terms, an enormous gain or a crushing loss. You can gauge a stock’s volatility by looking at how wildly it has moved in the past or, alternatively, how expensive it is to insure it against big jumps in the future.All this feels pretty risk-like, even if a nagging doubt remains that real-life worries lack the symmetry of a bell curve: cross the road carelessly and you risk getting run over; there is no equally probable and correspondingly wonderful upside. But set such qualms aside, pretend volatility is risk and you can construct an entire theory of investment allowing everyone to build portfolios that maximise their returns according to their neuroticism. In 1952 Harry Markowitz did just this, and later won a Nobel prize for it. His Modern Portfolio Theory (MPT) is almost certainly the framework your new wealth manager is using to translate your attitude to risk into a set of investments. The trouble is that it is broken. For it turns out that a crucial tenet of MPT—that taking more risk rewards you with a higher expected return—is not true at all.Elroy Dimson, Paul Marsh and Mike Staunton, a trio of academics, demonstrate this in UBS’s Global Investment Returns Yearbook, an update to which has just been released. They examine the prices of American shares since 1963 and British ones since 1984, ordering them by volatility and then calculating how those in each part of the distribution actually performed. For medium and low volatilities, the results are disappointing for adherents of MPT: returns are clustered, with volatility having barely any discernible effect. Among the riskiest stocks, things are even worse. Far from offering outsized returns, they dramatically underperformed the rest.The Yearbook’s authors are too thorough to present such results without caveats. For both countries, the riskiest stocks tended to also be those of corporate minnows, accounting for just 7% of total market value on average. Conversely, the least risky companies were disproportionately likely to be giants, accounting for 41% and 58% of market value in America and Britain respectively. This scuppers the chances of pairing a big long position in low-volatility stocks with a matching short position in high-volatility ones, which would be the obvious trading strategy for profiting from the anomaly and arbitraging it away. In any case, short positions are inherently riskier than long ones, so shorting the market’s jumpiest stocks would be a tough sell to clients.Yet it is now clear that no rational investor ought to be buying such stocks, given they can expect to be punished, not rewarded, for taking more risk. Nor is the fact that they were risky only obvious in hindsight: it is unlikely that the illiquid shares of small firms vulnerable to competition and economic headwinds ever looked a great deal safer. Meanwhile, lower down the risk spectrum, the surprise is that more people do not realise that the least volatile stocks yield similar returns for less risk, and seek them out.Readers may not be flabbergasted by the conclusion—that investors are not entirely rational after all. They might still wish to take another look at the racier bits of their portfolios. Perhaps those are the positions that will lead to a gilded retirement. History, though, suggests that they might be speculation for speculation’s sake. Call it return-free risk.■Read more from Buttonwood, our columnist on financial markets: Uranium prices are soaring. Investors should be careful (Feb 28th)Should you put all your savings into stocks? (Feb 19th)Investing in commodities has become nightmarishly difficult (Feb 16th)Also: How the Buttonwood column got its name More

Africa’s tallest building is rising under empty skies. Beneath the Iconic Tower in northern Egypt sits a city that officials expect to one day house 6.5m people. For now, though, it is mostly empty—like the desert that came before it.Egypt’s “New Administrative Capital” is part of a rush of city-building. Firms and governments are planning more settlements than at any time in the post-war period, with many already under construction. Ninety-one cities have been announced in the past decade, with 15 in the past year alone. In addition to its new capital in the north, Egypt is building five other cities, with plans for dozens more. India is considering eight urban hubs. Outside Baghdad, Iraq, workers have just broken ground on the first of five settlements.And it is not just emerging economies that are building. Investors in America have spent years secretly buying land for a new city in California. To the east, the deserts of Arizona and Nevada have lured Bill Gates and Marc Lore, two billionaires, each with plans for their own metropolis. Even Donald Trump, in his bid for re-election, has proposed ten “freedom cities”. In their early stages, many of these projects will attract derision. History suggests that plenty will fail. But the number and diversity of settlements under construction suggests some will triumph.That is a great thing. Edward Glaeser of Harvard University has lauded cities as mankind’s greatest invention. He notes that agglomerations of money and talent make societies richer, smarter and greener. Since companies move closer to their customers and people closer to their jobs, growing cities beget economic growth. Economists think that doubling a city’s population provides a boost to productivity of 2-5%. Given both the pressing need for new urban areas and the constraints on physical growth in existing ones, starting afresh is sometimes a shrewd decision.In much of the poor world, land disputes, shantytowns and poor infrastructure choke development. The problem will worsen as urban areas swell by an extra 2.5bn inhabitants by 2050, according to projections by the United Nations, with the new urbanites appearing in regions where cities are already under extreme stress. Builders hope that new metropolises will help relieve the pressure. In Nairobi, near where Stephen Jennings, a former private-equity boss, is building a new city called Tatu, public-transport commutes run to over an hour for most jobs. Construction is progressing nicely in Kenya’s newest settlement, where 5,000 residents already live and work in a gated village. Mr Jennings is building seven other cities across five countries in the region.Rich-world cities have problems of their own. The push for a new town outside San Francisco—a project that goes by the label of “California Forever”—came from an “epic housing shortage” on America’s west coast, says Jan Sramek, who leads a group of Silicon Valley investors making it happen. The group, which includes Laurene Powell Jobs, Steve’s widow; Reid Hoffman, a co-founder of LinkedIn; and Sir Michael Moritz, a venture capitalist, will put their plans for “homes, jobs and clean energy” to a public vote in November. If approved, the city will house up to 400,000 residents on 60,000 acres of what is now farmland. Starting again is a necessary part of the solution to housing shortfalls, says Mr Sramek, citing the high costs of revamping existing infrastructure.California Forever is among a clutch of planned towns that also aim to improve urban living. The developer is promoting high-density neighbourhoods in which residents can reach schools, jobs and shops without a car. Today’s city-builders have decided that walkability—or what is sometimes called a “15-minute city”—is a crucial selling point. Some, like Dholera in India and Bill Gates’s Belmont in Arizona, are pitching so-called “smart cities”, which use sensors to direct residents away from traffic or tell them the most environmentally friendly time for a shower.A few projects double as social experiments. Mr Lore’s Telosa city (adapted from the Greek word for “highest purpose”) will do away with private ownership of land, which will instead be held in a communal trust, with money generated from leasing it spent on public services. Praxis (another Greek word, meaning “theory in practice”) has raised $19m and collected a waiting list of potential residents who want to “create a more vital future for humanity” in the Mediterranean. A private company is building Próspera, a cryptocurrency-accepting, libertarian special economic zone in the Honduras, with a mission to “maximise human prosperity”. Praxis and Próspera are funded in-part by Pronomos, a venture-capital fund established in 2019 to invest in new cities, which is run by Patri Friedman (grandson of Milton) and counts Marc Andreessen and Peter Thiel, two billionaire investors, among its supporters.Messrs Andreessen, Lore and Thiel are among a crop of wealthy folk with ideas about how to run cities. But governments also want to experiment. Abundant capital and low interest rates in the 2010s allowed politicians to borrow cheaply. Although rates are now higher, enthusiasm for building remains, as countries copy one another. Leaders are keen on using state finances to reshape domestic economies—and believe that new cities will help.Houses built on sandMuhammed bin Salman of Saudi Arabia hopes that several gleaming new metropolises will attract industries that his country lacks, such as financial services, manufacturing and tourism. NEOM, a city made up of a 170km-long building in the desert, is to be the jewel in the crown. Egypt’s New Administrative Capital is purpose-built for the state’s bureaucratic machinery; the government hopes it will reduce congestion in Cairo. The city already includes the Ministry of Defence’s imposing Octagon—not to be confused with America’s Pentagon—which spreads over a square kilometre. In Indonesia workers are clearing forests for a new capital, Nusantara. For leaders such as Joko Widodo of Indonesia and Abdel Fattah el-Sisi of Egypt, a new capital promises a legacy, lots of jobs and the ability to keep voters at arm’s length.image: The EconomistIn other countries, rulers have slightly more esoteric ambitions. El Salvador is planning to sell bonds that pay out in bitcoin in order to fund a crypto-city. The Kingdom of Bhutan said in December that it would build a “mindfulness city”, with neighbourhoods designed on the repeating geometric patterns of a mandala, a Buddhist symbol. The emergence of the China State Construction Engineering Corporation, whose workers are building cities in Africa, South-East Asia and the Middle East, has lowered the costs of all megaprojects, whether fanciful or prosaic.How many of these cities will prosper? Some infrastructure, such as electricity, internet and roads, must be in place before the first resident arrives, which means that upfront costs can be staggeringly large. Mr Sramek’s company has already sunk $1bn into buying land for California Forever and will need an additional $1bn-2bn for just the first stage of construction. Mr Lore expects to marshal $25bn in initial investment for his city in the desert. Prince Muhammed will lean on his kingdom’s oil riches to pay for NEOM at an initial cost of $319bn. But enthusiasm, and money, can run out; grandiose projects can become white elephants. Work on Egypt’s $60bn capital city has slowed as the country’s economy falters. The Chinese developer behind Malaysia’s Forest City defaulted in 2023, before residents had even moved in.History points to characteristics shared by successful projects. State institutions can help anchor cities, as Brasília (in Brazil) and Chandigarh (in India) showed in the 20th century. Although both have had problems, people in Brazil and India are voting with their feet. Brasília’s population is growing at 1.2% a year, more than double the national average. Chandigarh, a state capital, is now India’s fourth-richest region on a per-person basis.The future is less certain for cities that cannot rely on taxpayers to provide jobs and pay the bills, but California Forever and Tatu seem to be based on sensible ideas. As Mr Jennings puts it, the crucial thing is to focus on getting the “boring stuff”, such as roads and sewerage, right in order to create a city that is walkable and green, but not especially smart. In addition to being what he calls “a dumb city”, Mr Sramek’s California Forever shares another advantage with Tatu: both will piggy-back on neighbouring economies. “We are five miles away from cities on both sides,” says the Californian developer. “The strength of the demand makes a big difference to how fast you can grow.” In Britain, Milton Keynes—a city established in the 1960s, less than an hour by train from London—is thriving. Reston, a planned town outside Washington, DC, is another success.Sensible city-builders are wary of taking on debt. Developers have instead started to sell stakes in projects, demonstrating buy-in for what are long-term ventures. “You are looking at a 50-year time horizon,” says Mr Jennings, who admits that it “sounds insane”. He has tapped friends for capital, avoiding private-equity backers and their investment horizons, which normally come in at under a decade. California Forever is entirely funded by equity investments. If the two new settlements succeed, their investors will be rewarded. But so will many others. That is the glory of cities. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

During the past few years of inflation, sceptics have insisted that governments are undercounting price rises—usually without much evidence to support their claims. But a new controversy in American economics has highlighted the challenge of accurately measuring prices. Only this time the implication points in the opposite direction, suggesting that inflation may prove a more stubborn foe.At issue is the manner in which housing fits into the consumer-price index. To the surprise of many casual observers, statisticians typically do not include property prices in their inflation gauges since they view housing as an investment good, perhaps a once-in-a-lifetime purchase for homebuyers. However, statisticians do know that housing is a big part of personal budgets and want to track regular changes in the price of shelter, much as they do for other consumer products. So instead of measuring property prices outright, their inflation indices factor in how much people pay for rent—or would pay for rent if they leased their own homes. The latter is known as owners’ equivalent rent (OER).In America OER accounts for about a quarter of the consumer-price index, making it the single biggest component. Direct rent, by contrast, is just 8% of the index, because renting is less common: about two-thirds of American households own the homes they live in. Where things get tricky is estimating the OER value. It is not as simple as totting up all market rents and assuming that homeowners would pay the same. Rather, wonks assign a heavier weight to rental prices for single-family homes, which are similar to the kinds of houses that people own. The problem is that there is a relative dearth of single-family homes for rent, giving statisticians a small sample with which to work.These intricacies have come to the fore as concerns mount about the persistence of inflation in America. In January the consumer-price index rose by 0.3% from a month earlier, above forecasts for a 0.2% increase, suggesting that the Federal Reserve is struggling to tame inflation. But nearly half of the broader inflation increase was attributable to a rise in OER alone. And strikingly, the rise in OER was much higher than the rise in market rents.image: The EconomistThe question is whether OER is being estimated correctly. It is true that single-family homes have commanded larger rent increases than flats recently, a reflection of the fact that few such homes are available to tenants. Moreover, the Bureau of Labour Statistics, which compiles the consumer-price index, tweaked its methodology in January, lifting the weight of detached single-family homes in OER by about five percentage points, part of its constant efforts to capture changes in how people live. The combination of higher rents plus a larger weighting does explain much of the rise in OER. Added to that, though, is the inevitable volatility of extracting prices from the small sample of single-family homes for rent. This raises the possibility that at least some of the high OER reading was a fluke.Still, the bigger picture is that OER inflation is running well above pure rent inflation (see chart). Continued tightness in the market for single-family homes ensures the divergence will probably continue for some time, and this in turn will place upward pressure on general measures of inflation. The details of how to calculate OER can seem abstruse. But the conclusion is clear: by feeding into stickier inflation, it may well deter the Fed from cutting interest rates anytime soon. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

Working out who earns what is surprisingly tricky. Both the very rich, who sometimes try to keep their wealth from the taxman, and the very poor, who are sometimes mistrustful of clipboard-wielding officials, are especially hard to pin down. Nevertheless, before the covid-19 pandemic, household surveys consistently found a fall in the number of people living in poverty. The World Bank counted 659m living on less than $2.15 a day in 2019, down from around 2bn in 1990.Yet this progress came at a cost: a global “precariat” emerged, members of which were barely out of poverty and perilously exposed to shocks, while the top 1% got rich faster. That, at least, is the received wisdom. The World Inequality Database, a project associated with Thomas Piketty and Gabriel Zucman, two economists, combines tax data with other sources of information to estimate the incomes of the uber-rich. They have found that although inequality between countries has fallen, as the rest has caught up with the West, within countries it may have risen. Chinese and Indian elites have done the best relative to their countrymen. American and European plutocrats, who are busy stashing wealth in tax havens, have done well, too.A new paper by Maxim Pinkovskiy, Xavier Sala-i-Martin, Kasey Chatterji-Len and William Nober, economists at Columbia University and the New York branch of the Federal Reserve, challenges this picture. The researchers look at how likely people in different parts of the income distribution are to understate their income. They find that as the poor become richer, they become more likely to do so. Once adjustments are made for this, poverty has fallen faster than previously thought, and inequality within countries has not risen. It may even have fallen slightly.To reach this conclusion, the authors look at the difference between estimates of income from regional household surveys and gross domestic product in the same area. When surveys imply that a region has less overall income than official figures, it suggests more income is going unreported. The researchers find that the richer an area, the larger the gap tends to be. This makes sense, notes Mr Sala-i-Martin. As a subsistence farmer becomes a small business owner or market trader, he develops more complex income streams and has more incentive to mislead the taxman.If the finding holds, it changes the history of globalisation. Rather than a precariat, the researchers conclude that a “true global middle class” has emerged. Its members will not be plunged back into poverty by a financial crisis or a pandemic.Yet the study will not be the final word. Economists have been arguing about trends in global inequality—and the quality of the data that lie beneath them—for decades. When it comes to the world’s richest people, the new research has more to say about the top 10% than the top 1%, who are widely believed to have done so much better than the rest. Like most papers, this one relies on assumptions that could be challenged by other researchers. Working out the global income distribution is one thing; convincing others you have the right answer is quite another. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

The $1 billion-plus injection that New York Community Bank announced Wednesday is the latest example of private equity players coming to the need of a wounded American lender.
Key to these deals is speed and discretion, according to advisors to several recent transactions and external experts.
Steven Mnuchin reached out to NYCB directly to offer support amid headlines about the duress it was under, according to a person with knowledge of the matter.

Federal Reserve Chair Jerome Powell fist-bumps former Treasury Secretary Steven Mnuchin after a House Financial Services Committee hearing on “Oversight of the Treasury Department’s and Federal Reserve’s Pandemic Response” in the Rayburn House Office Building in Washington, D.C., on Dec. 2, 2020.
Greg Nash | Reuters

The $1 billion-plus injection that New York Community Bank announced Wednesday is the latest example of private equity players coming to the need of a wounded American lender.
Led by $450 million from ex-Treasury Secretary Steven Mnuchin’s Liberty Strategic Capital, a group of private investors are plowing fresh funds into NYCB. The move soothed concerns about the bank’s finances, as its shares closed higher on Wednesday after a steep decline earlier in the day.

That cash infusion follows last year’s acquisition of PacWest by Banc of California, which was anchored by $400 million from Warburg Pincus and Centerbridge Partners. A January merger between FirstSun Capital and HomeStreet also tapped $175 million from Wellington Management.
Speed and discretion are key to these deals, according to advisors to several recent transactions and external experts. While selling stock into public markets could theoretically be a cheaper source of capital, it’s simply not available to most banks right now.

“Public markets are too slow for this kind of capital raise,” said Steven Kelly of the Yale Program on Financial Stability. “They’re great if you are doing an IPO and you aren’t in a sensitive environment.”
Furthermore, if a bank is known to be actively raising capital before being able to close the deal, its stock could face intense pressure and speculation about its balance sheet. That happened to Silicon Valley Bank, whose failure to raise funding last year was effectively its death knell.
On Wednesday, headlines around noon that NYCB was seeking capital sent its shares down 42% before trading was halted. The stock surged afterward on the news that it had successfully raised funding.

“This is the unfortunate lesson from SVB,” said an advisor on the NYCB transaction. “With private deals, you can talk for a while, and we almost got to the finish line before there was any publicity.”

Mnuchin’s outreach

Mnuchin reached out to NYCB directly to offer support amid headlines about the duress it was under, according to a person with knowledge of the matter. Mnuchin isn’t just a former Treasury secretary. In 2009, he led a group that bought California bank IndyMac out of receivership. He ultimately turned the bank around and sold it to CIT Group in 2015.
Now, with the assumption that Mnuchin and his co-investors have seen NYCB’s deposit levels and capital situation — and are comfortable with them — the bank has much more time to resolve its issues. Last week, NYCB disclosed “material weaknesses” in the way it reviewed its commercial loans and delayed the filing of a key annual report.
“This buys them a ton of time. It means the FDIC isn’t coming to seize them on Friday,” Kelly said. “You have a billion dollars in capital and a huge endorsement from someone who has seen the books.”Don’t miss these stories from CNBC PRO: More

New York Community Bancorp has agreed to a deal with several investment firms including Steven Mnuchin’s Liberty Strategic Capital, Hudson Bay Capital and Reverence Capital Partners for more than $1 billion in exchange for equity.
Shares of the bank were down sharply for the day before the announcement.
A cash infusion would be the latest development in a turbulent start to the year for NYCB, which replaced its CEO last week.

Struggling regional lender New York Community Bancorp announced a $1 billion capital raise and a leadership shake-up on Wednesday, headlined by former Treasury Secretary Steven Mnuchin, leading to a sharp rebound for its stock.
NYCB has agreed to a deal with several investment firms including Mnuchin’s Liberty Strategic Capital, Hudson Bay Capital and Reverence Capital Partners for more than $1 billion in exchange for equity in the regional bank, according to a press release Wednesday afternoon.

Mnuchin will be one of four new members of the bank’s board of directors as part of the deal. Joseph Otting, former comptroller of the currency, is also joining the board and taking over as CEO.
The stock jumped sharply after the announcement, but trading was highly volatile. Shares were briefly halted, up nearly 30% for the day. They gave back some of those gains when trading resumed and finished the day up more than 7% after several more halts.
Prior to the press release, the stock was down 42%, amid reports from Reuters and The Wall Street Journal that NYCB was exploring a capital raise.

Stock chart icon

Shares of NYCB fell sharply on Wednesday.

The stock was below $2 per share at its lowest point on Wednesday, the latest negative milestone for a company that began January above $10 per share.
The cash infusion is the latest development in a turbulent start to the year for NYCB. The bank disclosed in late January that it was dramatically raising the allowance for potential loan losses on its balance sheet, with its exposure to commercial real estate being a potential issue. That was followed shortly by Moody’s Investors Service downgrading the bank’s credit rating to junk status, and NYCB naming former Flagstar bank CEO Alessandro DiNello as executive chairman.

Then last week, NYCB disclosed that it had “identified material weaknesses in the company’s internal controls related to internal loan review” and announced that DiNello was taking over as CEO, for what proved to be a brief tenure. DiNello will stay on as nonexecutive chairman at the bank, according to Wednesday’s press release.

The questions surrounding NYCB are reminiscent of those that swirled around Silicon Valley Bank, Signature Bank and First Republic before all three failed in the spring of 2023. They were among several regional banks that struggled as higher interest rates pushed down the value of older Treasury holdings and led some depositors to move their accounts elsewhere.
With the U.S. economy continuing to show surprising strength and inflation still above the Federal Reserve’s 2% target, traders have been dialing back expectations for interest rate cuts this year. The higher-for-longer rate environment could keep pressure on the banks themselves and on commercial real estate, which is a key business for NYCB and many other regional lenders.
The struggles for NYCB may have caught regulators off guard as well as investors. The regional lender acquired much of Signature Bank out of receivership from the Federal Deposit Insurance Corporation last March.Don’t miss these stories from CNBC PRO: More