The sudden surge in volatility experienced by regional bank stocks last week resulted in unprecedented losses for investors, while providing substantial gains for speculators.
This pertains to individuals who staked their fortunes on the anticipated decline in stock prices. These speculative investors, akin to vultures, are currently circling over the banking sector, aiming to capitalize on the turbulence.
Notably, the cumulative value of unrealized profits on the stocks of a single bank momentarily reached a staggering $119 million, with the potential for even higher gains.
Goldman Sachs' data reveals that hedge funds, for 11 consecutive sessions leading up to the unfortunate results day for NYCB bank, were strategically closing short positions in the most frequently traded regional banks.
Consequently, the largest bears, erroneously interpreting the market, withdrew from positions targeting the regional lending sector.
Data from the hedge fund S3 Partners LLC, cited by Bloomberg, highlights that the sell-off in regional banks yielded substantial profits for speculators within two sessions following the poor performance of New York Community Bancorp (NYCB) on Wednesday.
The bank's shares plummeted by an alarming 45%, translating to almost $120 million in profits for those who speculated on the decline. This drastic market shift was precipitated by a significant increase in provisions for credit losses, reaching $552 million, far surpassing the market's expected $45 million.
Additionally, a dividend cut further contributed to the decline. NYCB's challenges included exposure to commercial real estate and the prospect of stricter regulations due to increased size.
This prompts the question of whether this trend will extend to other regional banks. Wedbush Managing Director David Chiaverini expressed that this situation is likely to be confined to NYCB, emphasizing the unique characteristics of the commercial real estate market and the varying loan default rates that different banks face.
The key question remains: will this be the prevailing scenario for other regional banks?
Last year, the turmoil in regional banks attracted the attention of short sellers, who, as is their custom, stirred controversy by scrutinizing the loan portfolios of lenders for weaknesses arising from rising interest rates and commercial real estate concerns.
Their focus was on the weakest stocks within the sector. The collapse of First Republic Bank emerged as the most lucrative short bet for bears that year, generating approximately $1.6 billion in profits according to S3 data.
Some investors perceived the recent decline as an opportunity to make strategic purchases. However, NYCB shares only witnessed a modest increase on Friday, while the regional bank index stabilized.
Lingering questions revolve around whether NYCB customers hastily withdrew funds and the potential challenges in identifying credit issues, which might manifest as sudden or one-time problems.
Analysts have pointed out specific factors contributing to the dynamics, such as the increase in assets resulting from the acquisition of the failed Signature Bank last year, which shifted it into a different regulatory bracket—a circumstance unique to the company.
For instance, William C. Martin, quoted in Yahoo Finance, who oversees his family office, Raging Capital Ventures, expressed confidence in the overall health of the economy.
Recent macroeconomic indicators from the United States unequivocally support this view.
Martin gained attention last year in connection with the collapse of Silicon Valley Bank. In the months leading up to the bank's notorious downfall, he had expressed concerns about the lender's securities portfolio.
He emphasized the temporal aspect of economic cycles, stating that "It just takes time. Cycles take time."
The analogy is drawn to the balance sheet time bomb observed in SVB, raising the question of whether a similar situation is unfolding with NYCB.
03.02.2024
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