Banks Face a Growing Real Estate Crisis

Banking crisis déjà vu?

The sell-off in regional bank stocks looks set to worsen on Wednesday, after Moody’s cut New York Community Bancorp’s credit rating to junk status.

Fears are now rising among investors over the United States’ distressed commercial real estate sector. This comes as a crucial lifeline created during last year’s banking crisis is set to expire.

N.Y.C.B.’s shares plunged as much as 15 percent in premarket trading after the downgrade, before rebounding. The stock has plummeted roughly 60 percent in the past week after the lender reported dismal results, especially stemming from its exposure to souring commercial real estate loans.

Last year, N.Y.C.B. won the bidding for assets tied to Signature Bank, which failed shortly after the demise of Silicon Valley Bank. That pushed its assets above $100 billion, putting it into a new regulatory category, and subjecting it to more stringent capital requirements.

Bank jitters are spreading. The KBW Nasdaq Regional Banking Index, a collection of midsize bank stocks, has fallen nearly 12 percent in the past week as investors worry about lenders’ exposure to commercial real estate loan portfolios.

Plunging office occupancy rates and high interest rates are a big reason. The shift in working practices after the height of the coronavirus pandemic has roiled the commercial real estate market and lenders could face a “maturity wall” of as much as $1.5 trillion in commercial real estate loans set to come this year and next. (U.S. regional banks provide the bulk of such loans, putting them at particular risk.)

Officials have acknowledged that some banks may be at risk, but have downplayed worries of a wider crisis. “I believe it’s manageable, although there may be some institutions that are quite stressed by this problem,” Treasury Secretary Janet Yellen told the House Financial Services Committee on Tuesday.

Complicating matters, a funding lifeline expires next month. On March 11, the Fed’s Bank Term Funding Program will stop making specially low-interest loans to distressed lenders. The program was established last year amid the collapse of Silicon Valley Bank to help lenders shore up their finances on the cheap, and restore the public’s confidence in the wider banking system. The sinking share prices suggest that investors aren’t buying that message.

European and Asian banks are on the hook, too. Shares in Japan’s Aozora Bank and Switzerland’s Julius Baer have sunk in recent weeks after both disclosed risks from souring commercial real estate loans.

Meanwhile, other European banks, including Banco Santander and Deutsche Bank, increased their exposure to the $6 trillion U.S. real estate debt market in the first half of last year despite concerns about a tsunami of bad loans on the horizon, according to S&P Global.

HERE’S WHAT’S HAPPENING

Nikki Haley comes second in a Nevada race with no direct competition. She lost to a “none of these candidates” ballot option in Nevada’s Republican presidential primary on Tuesday, thanks to troublemaking from Donald Trump’s campaign (which didn’t participate otherwise). It’s an embarrassing showing for Haley, though she has staked her campaign on the South Carolina primary this month.

An Alaska Airlines 737 jet may have left a Boeing factory missing bolts. A preliminary report by the National Transportation Safety Board found that the plane whose door panel blew out mid-flight last month didn’t appear to have all of its bolts after repairs. The finding intensifies scrutiny on Boeing and its quality-control practices.

The fate of a bipartisan bill on border security and Ukraine funding is sealed. Senate Republicans effectively torpedoed legislation for cracking down on immigration — which also would have allocated billions to Kyiv — that they had demanded. It was only one of several signs of paralysis among congressional Republicans, who also rejected their own efforts to impeach the homeland security secretary and to send military aid to Israel.

Questions remain about Adam Neumann’s takeover bid for WeWork. Dan Loeb’s Third Point said that it hadn’t committed funding and had held only “preliminary” conversations with the WeWork co-founder despite being cited as a financing source for the potential deal. It’s also unclear how SoftBank, a major creditor to WeWork that’s largely written down its stake in the co-working company, will respond to Neumann’s efforts; a spokesman declined to comment.

Disney bets on a sports streaming revamp

Ahead of its latest earnings report on Wednesday, Disney, Fox and Warner Bros. Discovery announced a new sports streaming service that could change the media landscape.

The deal is a major response to the upheaval in the cable industry — and comes as Disney faces pressure from the activist investor Nelson Peltz over its streaming strategy.

How the new venture works: The service will feature channels like ESPN, TNT and FS1, which show pro and college sports games (as well as content like “The Bachelor” that also air on those networks). Importantly, the three companies will license the sports programming on a nonexclusive basis, meaning that they can continue to show games on their TV channels as well.

Based on the venture’s structure, which divides payouts according to the contributions each channel makes to it, Disney’s ESPN will take home the largest chunk of revenue.

The new service carries some risks:

• It won’t be cheap — most likely costing upward of $40 — because the companies can’t sell the channels for less than what they’re offering cable companies, which could price out some customers.

• It may raise eyebrows in Washington, given regulators’ aggressive examinations of deals that aren’t traditional acquisitions. (That said, Disney, Fox and Warner Bros. Discovery would still operate independently — including making their own bids for sports rights — and the games will be available on other formats.)

• Though it will feature about 55 percent of U.S. sports rights, according to analysts at Citigroup, it won’t be comprehensive, because the venture doesn’t include Paramount, NBCUniversal or regional sports networks.

The venture helps address a big question on analysts’ minds: How can Disney improve the margins of its direct-to-consumer business, particularly as Peltz calls on the company to aim for Netflix-like streaming economics?

Another headline-grabber dropped on Tuesday: Elon Musk, who’s still upset over Disney pausing its ads on his X social network, is financing a wrongful termination lawsuit against the company brought by the actress Gina Carano, who was dropped from “The Mandalorian” TV show in 2021. “Please let us know if you would like to join,” Musk wrote on X.

Meanwhile, Musk — who has cheered on Peltz’s Disney campaign — posed for photos with the financier over the weekend at the Los Angeles premiere of a movie that one of Peltz’s daughters wrote, directed and starred in.

Fighting D.E.I. pushback

The hedge fund mogul Bill Ackman and Elon Musk have been on a warpath over diversity, equity and inclusion efforts in recent weeks, generating headlines as they hit out at D.E.I. programs on social media.

Now, supporters of D.E.I. initiatives are fighting back to defend a practice that they say is good for the bottom line and has been “politicized by a vocal minority.”

The business case for diversity remains strong, a dozen trade groups that represent minority communities have written in a letter sent on Wednesday to Fortune 500 C.E.O.s, and shared first with DealBook. The signatories include the National Minority Supplier Development Council and the U.S. Black Chambers, who argue that “empirical analyses reveal how companies that champion diversity and inclusion outperform their peers who do not.”

Companies and executives largely support D.E.I., they say. Most senior executives polled in a national survey conducted in December for the research group the Public Private Strategies Institute said diversity initiatives were critical to their companies’ success. Notably, 75 percent of self-described conservative executives said D.E.I. efforts bolstered business performance, compared with 89 percent of self-described liberal executives.

“There is a strong business case for diversity,” Ying McGuire of the nonprofit National Minority Supplier Development Council told DealBook. “We need to focus on that.”

Recent setbacks haven’t derailed that commitment. Some companies are eliminating or reframing how they talk publicly about D.E.I. The Supreme Court rejected affirmative action at colleges last year, and Republican state attorneys general are stepping up scrutiny of corporate D.E.I. programs.

“I don’t think you’d ever know that it was him behind Litquidity, even if you met him or he told you point blank.”

— A friend of Hank Medina, a 32-year-old banker who unmasked himself as the man behind Litquidity, a finance-focused social media account with over 800,000 followers on Instagram.

A tech giant’s proposal for policing A.I. content

As governments worldwide consider ways to limit the risks of artificial intelligence, one of the biggest players in the field, Meta, has proposed a way to address one of the biggest concerns: telling what’s real and what’s fake online.

Meta is calling for industrywide standards for A.I.-created content. Under this proposal, tech companies could quickly discern images, video and audio that were generated by A.I. and label it as such.

Meta is looking at using specifications that rely on tags in content metadata, hoping to coalesce various industry initiatives.

It’s an effort to address an issue that’s a focus of policymakers. A bipartisan bill introduced in the Senate in October called on tech companies to adopt such standards.

Regulators are especially worried about the misuse of A.I.-generated content in an election year. (Meta’s own quasi-judicial Oversight Board cited that concern this week as it urged the company to better label manipulated media, after reviewing a post involving a fake video of President Biden.)

The prospects for the initiative are unclear, especially with various companies pursuing different approaches to labeling A.I.-created content. And Nick Clegg, Meta’s president of global affairs, conceded that no system would be perfect: “Bad actors are always going to try and circumvent any standards we create,” he told The Times.

THE SPEED READ

Deals

• The natural gas producers Woodside Energy and Santos ended talks about a potential merger, which would have created a $57 billion energy giant. (WSJ)

• The industrial conglomerate Standard Industries is said to be in talks to buy Air Mail, the media start-up founded by Graydon Carter. (Semafor)

Policy

• Beijing replaced its top securities regulator as Xi Jinping’s government seeks to restore investor confidence amid an $8 trillion rout in Chinese stocks. (Bloomberg)

• The heads of McKinsey and Boston Consulting Group told U.S. lawmakers that their employees in Saudi Arabia could face jail if their firms revealed their work for the kingdom without its approval. (FT)

Best of the rest

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