ABS East: Steve Eisman Brings Down the House (Again)
What does Steve Eisman have to say to the industry whose blunders made him rich?
“You f------ blew up planet earth. Shut up and move on.”
Eisman, the money manager who foresaw, and profited from, the collapse of the subprime mortgage market, hadn’t attended a securitization conference since 2007, as portrayed in the movie, The Big Short. But Information Management Network, the organizer of an annual confab in Miami, clearly recognizes a good draw. It invited him to give the keynote speech Sunday.
“It feels like Daniel in the lion’s den,” he quipped.
Then he apologized in advance for offending his audience, and launched into an explanation of the mortgage crisis and an assessment of the current state of the economy and financial system, or “why things still suck.”
Bottom line, we don’t have the three prerequisites for a full-blown crisis: too much leverage, a big asset class that blows up, and a lot of banks holding this asset class.
By that measure, neither subprime auto loans nor student loans are going to be the next mortgage crisis.
Eisman seems more concerned about Europe, where banks are still much more highly leveraged than in the U.S., and where regulators in peripheral countries like Italy, Spain and Portugal have been slow to force them to recognize losses.
He's actually pretty pleased with U.S. financial regulations enacted since the financial crisis, particularly given how critical he was of regulators' performance in the past.
“Prior to Dodd-Frank, the bank regulators had two tasks: Protecting the safety and soundness of the banking system, and protecting consumers from bad actors in the financial services industry,” he noted. “They did as bad a job as anybody could do anything in the history of planet earth.”
Dodd-Frank split these two roles, creating the Consumer Finance Protection Bureau and giving the Federal Reserve primary responsibility for the banking system.
“The CFPB has done a great job, in my opinion,” Eisman said. “Wall Street doesn’t like it … but I really couldn’t care less.”
The money manager said he did not expect the Fed to be very effective “but I’m happy to say they’ve proven me wrong.” He noted that Citibank’s leverage ratio has declined to 10 to 1 from 35 to 1 before the financial crisis “which is like the distance between Mercury and Pluto.”
(You can read more about Eisman's views on bank regulation here.)
Eisman’s most cutting remarks, and his biggest laughs, came at the expense of audience members who asked if regulation gone too far.
One person complained that regulation was being applied not just to mortgages but to securitization of all kinds of assets that performed well during the financial crisis.
That’s when he told the audience to shut up and move on, adding, “Who gives a s--- if it’s fair.”
Below are some of his other musings, in no particular order.
“QE is no more than monetary policy for rich people,” the money manager quipped.
He said that central banks “use QE to go out the risk curve, so people invest in the stock market, but it does not impact the economy. Most people do not invest in the stock market, they invest in banks [they are saving more] and banks don’t pay interest on their money.”
From a corporate perspective, GDP is lower than pre-crisis, if you buy back stock you get a return on your investment that’s fairly certain, or build a new factory, where the return is uncertain. In a zero interest rate environment, you’ll choose the more certain reward. Very low interest rates have a negative signaling effect. A lot of people think something has to be wrong.
Eisman is not a big believer in marketplace lending. “Silicon Valley is clueless,” he says.
“If you buy a book on Amazon, that’s the end of the relationship.” Whereas, if you make a mortgage, “that’s the beginning of the transaction.” And there are only two business models. “The first is to originate the loan and hold it, which means you’re a bank. That’s a low margin business. The second is to originate a loan and sell it, and who are they going to sell it to? You [Wall Street]. And you are fickle.”
GSE Market Share
“I’m about as left-wing as they come. Obamacare does not bother me. GSE dominance [of the mortgage market] does.”
“The reason that Fannie Mae and Freddie Mac continue to dominate the mortgage market is the federal government decided not to put people in jail. Instead it fined banks. Banks don’t want to get fined, so they don’t make [nonconforming] mortgages.”
The Big Short
So what did it feel like to prove everybody wrong?
“In 2007, I’m so happy I can’t stand it. But in 2008, it was planet earth [in trouble]. I told someone I felt like Noah … do you think Noah was happy?”
Asked to name the next big short, Eisman initially declined. “I’m not in such a rush to do it again,” he said. “It took years off my life.”
Then he relented, saying, “The only big short out there is when the world loses confidence in QE.” But he did not offer any ideas on how to profit.