Steve Eisman: “They mistook leverage for genius”Jun 06, 2021
They're all screwed, you know, you know, if
theycare about the ball game or they care about which actresses went into rehab. I think you should try medication, no, no, we agreed, if it interferes with work, you hate Wall Street, maybe it's time. Quit I love my job You hate your job I love my job You're miserable I love my job I love my job honey Mark Steve Iseman welcome to the offensive I'm glad I'm here because you've been portrayed in a book and a movie, which would you prefer? I'd say they were both pretty accurate as I was back then and let's just leave it at that, okay, I hear Brad Pitt's almost caladium in the movie isn't true.
I received a phone call from Adam McKay, who was the writer and director of the film, in November 2015 to tell me that he was writing the film and that there was a possibility of Brad Pitt playing me to which I replied that the only thing Brad Pitt and What I have in common is that we both have very good hair, so being one of the few people who sold out the coming financial crisis, how did it feel to watch this huge disaster unfold and not be able to do anything about it? The analogy I use is a bit like Noah in the ark, yeah, so you know Noah is in the ark, he's okay and he saved his family, but he's not exactly happy to hear everyone screaming outside, that was my experience.
Did you think that the financial market potential of the financial sector would get back up and running and return to some kind of normality as quickly as it did no, I didn't expect it to happen so quickly, you know, a lot of that was the fact that the government It backed the system and once it became a backstop to the system, the financial markets came back, but the banking system has changed, so in the book and the movie it's very clear that you're betting against the subprime mortgage market. Risk is not just an exchange but it is a kind of moral crusade.
Are you still in this moral crusade? I'm not because a lot of things have changed, you know, dodd-frank. I think a lot of things were really fixed. Leverage has gone down enormously. The Consumer Financial Protection Board has measures implemented to protect consumers. The world is very different from what it was before the crisis, hmm, but now many of these things are threatening. I mean, Donald Trump has promised to repeal much of the Dodd-Frank law, for example, it's not something I'm in favor of, I think it's going to be a big fight. You know, it's possible that the industry will be deregulated to such an extent that we're not going to go back to what it was, so, for example, you know what Citigroup used to be.
leveraged 35 to 1 today it is
leveraged 10 to 1 I feel like if we go into some kind of deregulation maybe we will get 2 to 3 more turns of leverage, it's not something I'm personally in favor of but I don't think it's a calamity hmm So Do you think that if Donald Trump were president today, more than one banker would have gone to jail for the financial crisis?
It's an excellent question and the answer is I don't know. Don't know. Don't know. I've thought about it a lot. I think there's definitely a very strong feeling that it was wrong that no one went to jail. I'm not going to say whether that sentiment is correct or not, but there is definitely a very strong feeling in the country that that is the case and I think people are very angry that no one went to jail again. I'm not going to say if that is right or wrong and if people had gone to jail I think that would have calmed down some of the hangar that was seen in the election, so the impact of the elections is possible, but it is impossible, it is impossible to say now, so now taxes cannot be done and financial regulators because the population will campaign against Wall Street 1, right, right, okay, so what do you do with the investment?
I heard you are investing quite a bit in bank stocks, well, I mean there are two issues: what I think about the finances of the financial system and what I think about financial stocks and the two do not necessarily correlate with respect to the financial system. I think what has been done has been a good thing, but it has been very intense: the bank, the Dodd-Frank law and the Federal Reserve forcing people to deliver to reduce risk, etc., so from a system financial, I am very happy to be able to say very firmly that The United States financial system has never been so healthy in my lifetime, but it has been very painful for financial stocks because when you give in and take risks, you make less money and therefore Therefore, it hurts your stock price, which is why the last six years have been extremely painful. for financial stocks especially banks as they have delivered and are more expensive, if we go to a world where we are going to deregulate and leverage will increase at least some will just reverse history so financial stocks should do well performance. okay, okay, like I said, the financial system, the financial stocks, but they're not necessarily the same and interest rates in the United States are going up, yeah, that's very good for the banks, okay, so the United States is going from monetary stimulus to fiscal stimulus with something, but that's something I'm in favor of yes, I think infrastructure investment is a good thing yes, that's correct until you believe that quantitative easing is a strategy successful why there aren't too many negative impacts from there to I mean, look, it was a noble experiment there was no fiscal expansion there was no other game in town so I don't blame the Fed for doing it the idea was that lowering rates would make people went up or out of the risk curve and invested in the economy and really The other thing that happened was that they went out on the risk curve by buying back their own shares, they didn't really invest in the economy and with lower rates that hurt to the consumer because they make us money, we pay the money in the bank, so I have not done it.
Do you know that when we started quantitative easing monetary policy the growth was one and a half to two percent and after we did it it is one and a half to two percent, so in my opinion quantitative easing is a failure. November you told The Guardian in Europe, but Europe is screwed, you are still screwed referring to your bad loans in Italy, it depends on the country. Yes, are we in Europe still screwed? My wife wishes she hadn't said that. Yes. Okay, oh, we're in big trouble, it's not big, it depends on the country. You know, Italy has a big bad loan problem.
I don't see the Italian government doing anything to really solve that problem, if you will, before Christmas, it was an unpleasant assumption. that was just monte de Paz, yeah, and you never like to say monte de Partie because it's a big name and the oldest bank in the world, right, and I don't know, you could try to get Simmel to deposit ten times faster. It's very difficult, but it doesn't really solve the problem. I mean, this is something called the Texas ratio, which is a ratio that banking analyst Achon calculates, which is non-performing loans divided by tangible book value plus reserves, basically the numerators, all the bad stuff divided. with money you have to pay for bad things and one of the great lessons about banking analysis is that in Texas the proportion exceeds one hundred percent, the bank is done and in Italy the two largest banks are in paisa and credit and their Texas ratios are at ninety percent and all the other banks in Italy are above 100 percent, so I don't envy Italy, the problem is fine, famous ahma, the country there is bigger than which I think will not come and I think the problem with the banks. overall in Europe is that they are still undercapitalized and not making enough money for every dollar employed.
Basically European banks don't charge enough for these services they never had and they have tried to make up the difference with leverage and in a world where you have to use less leverage that model doesn't work, what about Deutsche Bank anyway ? % return on assets and it's loved or ten to one return on equity is 10% that's the simple formula so you know that Citigroup, for example, doesn't even have a 1% ROA, but they're not that far off, but Deutsche Bank today has a ROA of 30 basis points, they need to improve their profitability more than three times. There is no way Georgia Bank alone can improve its profitability threefold.
The entire European banking system has to have a price. You know how that's going to happen. Don't know. I don't know, but until I get through your paint benches, it might be a problem, it's going to be a problem, so you've been here in London for a few hours and you must have realized by now that that's all he talks about. the people here. with breakfast yes, so what financial risks do you think arise from Brexit? The big question is a big question. Okay, what will happen in March? I have no idea, you don't, I really have no idea, I honestly don't think so, and more importantly, does anyone else have any. idea that it's going to be an adventure and no, then it will be a fun adventure, but it will be an adventure, so you said that we are very bad at dealing with crises that develop very slowly and you blame the big guys. financial crisis of 2007-2008 on income distribution, do you really see that changing at all?
I mean, let me explain to you that yes, because it's not intuitively obvious how the two are connected, so you know, my thesis is that one of the underlying causes of the financial crisis. it was a poor distribution of income, so when I say people's eyes are generally like, you know what you're talking about, but I think there's a cause and effect relationship to that, you know, starting in the '90s, when income distribution began to decline. become really poor in the United States instead of focusing on that and what is the value of the solutions to that problem, let credit become democratized, that was the euphemism for will, it will make loans to people that we don't make loans to. before, so instead of getting people's income.
They allowed them to be leveraged and one of the ways that people got leveraged was by taking out loans on their homes and loving themselves that way, so I think one of the causes of the subprime crisis is that, after Dodd-Frank it's hard to get a home loan yeah you know revenues have just started to start growing again we'll have to see what the new administration does they can do anything hmm so no Frank it's more difficult to get a loan, but hey, it's difficult to get a mortgage why, although I don't think it caused a Dodd-Frank defect, I think it's more of an effect of all the fines that were imposed on the banks for the mortgage crisis , so I think the banks are not unreasonably a little worried. about making mortgage loans that maybe they shouldn't or shouldn't make so the financial crisis what he said the main problem was the products the tools available or the culture ah I would say it's one of the unrecognized aspects of the financial crisis that people I definitely haven't written that about what psychology is, yeah, and what I mean by psychology is that you have a whole generation of Wall Street executives who grew up in the '90s to the early '00s and who really only had one experience: they made more money each time.
In a single year, what they didn't really notice was that as they made more money each year, the leverage of their various institutions increased each year. Now they thought that they were making more money because it was them, but in reality what was happening was that they were making more money because their institution was becoming more leveraged and really what happened was that they confused leverage with
genius. I wrote that sentence because of the way I read that I do it. He is a good son. It's a good prayer. I don't write much. good lines, but that's definitely one of them that can be tweeted, yeah, it's very good, right, if I tweeted, I'd tweet, listen, so let's imagine you went to see a Wall Street executive around 2006 and you said to the CEO: You know, pick the name of your institution and you'd say dude, listen, your whole career paradigm is wrong, you have to deliver, so have you ever had a conversation like that?
I've never told this story before, there's AI, now you can tell the story, okay, um. So it's February 2008 and I have a meeting with the head of Risk Management and one of the big Wall Street firms. We won't name anyone else today, but it wouldn't matter because he would have had the same thing. There's been the same conversation with any of them, given discussion number one, so I sit down with a head of risk management at one of the big farms, Bear Stearns is almost a month away, and I say: you have to deliver and you have to to fulfill now because Armageddon is approaching.
The point is direct, it's almost a direct quote. I used the word Armageddon and he looks at me and says, you know, I hear what you're saying, but you know we're at medium-sized regional bank and had a lot of subprime mortgages, so it was a bit of aday. So I said, "Do you know what happens if Knacks City falls?" and he says no, "what's wrong." I said nothing. The regulator came in, they confiscated the bank, they paid the depositors, they fixed the bank, they sold the bank to the government. take a kind of loss end of story, do you know what happens if your company goes under?
Planet Earth burns who should be more leveraged and he looked at me like I was speaking ancient Greek like he was just so out of his paradigm it's like I don't know what he was talking about and I realized it was all over and that There was no way for these guys to do what needed to be done before the world exploded, but I think we're going to see someone to turn to. Jail, sure, I mean, you might have to disband the banking party. I do not know i do not know. I have the feeling that in a few years people are going to do what they always do in the economic tanks: they would be blaming the immigrants. and poor people, it's not in those times? always think in terms of disaster, yes, why is it that I have very strange DNA?
Do you see this paradigm changing at all? This culture, they told me, check it out, it's constantly changing. much more power for the Federal Reserve to regulate the banks, that power was put in the hands of Governor Daniel Tarullo and I think he has done a tremendous job helping the banks in the United States. I'd say the bank CEOs fought it by kicking. and shouting, but I would say in the last year or two they gave up and I know you said before that Europe hasn't done a good job with that, that's right, well that's your starting point, so now You know, Citigroup before the crisis. is leveraged thirty-five to one the German bank is reduced more than 50 to one so today's Citigroup is leveraged ten to one and the German bank depending on how it is calculated is probably leveraged twenty-five to one so the leverage of everyone is less European banks have always been much more leveraged than US banks, so they are still more leveraged, they just stayed over leveraged than right, no, they don't deliver enough for my taste, yeah, but back to back again to Paula Mills, they are not profitable enough per dollar employed, so regulators in Europe allow them to be more leveraged.
I think it's a mistake, but that's how systems work. Everyone asks you what the next crisis will be. So I don't have a penis. I know. I'm not going to ask you for money. I'll ask you that question. I'm saying you know everyone's trying to pick the next big short film and I already did. Not rush. OK. Thank you so much. Steve Eisman. Thank you.
If you have any copyright issue, please Contact