Steve Eisman: Quantitative Easing was a failure: it didn’t get corporations to borrow and invest. Rather, they borrowed and bought up their own stock.
Steve Eisman: Inequality was cause of Financial Crisis (10:17)
Steve Eisman: They made money because of their leverage (debt ratio) and they mistook their leverage for genius (12:19)
Steve Eisman was one of the few who predicted the 2008 financial crisis, and he made his name by foreseeing the collapse of subprime mortgage market.
Michael Lewis portrays him as one of the heroes in the bestselling book The Big Short and Steve Carrell plays an outspoken version of him in the Oscar-winning movie of the same name.
EFN:s Katrine Marçal meets Steve Eisman at Claridges hotel in London.
Transcript
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they’re all getting screwed you know you
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know if they care about they care about
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the ballgame or they care about what
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actresses went into rehab I think you
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should try medication no no we agreed if
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it interferes with work you hate Wall
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Street maybe it’s time to quit I love my
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job you hate your job I love my job
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you’re miserable I love my job I love my
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job honey
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mark Steve Iseman welcome to the offense
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I’m glad to be here so you’ve been
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portrayed in a book and in a film what
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did you prefer I would say they were
both fairly accurate as the way I was
back then and let’s just leave it at
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that okay okay so I’ve heard that some
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Brad Pitt’s almost caladium in the film
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it’s not true I got a phone call from
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Adam McKay who was the author director
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of the movie in November of 2015 to say
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that he was writing the movie and that
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there was a possibility that Brad Pitt
01:04
would play me to which I responded that
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the only thing Brad Pitt and I have in
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common is that we both have really good
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hair okay
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so being one a few people who sold the
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financial crash coming how did it feel
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to have see this big disaster unfold and
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not being able to do anything about it
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the analogy I use it’s a little bit like
Noah in the ark yeah so you know Noah’s
on the ark he’s okay and that he saved
his family but he’s not exactly happy
hearing everybody screaming outside
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that’s was sort of my experience all
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right did you think the financial market
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potential market from the financial
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sector would get back get back to
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business and get back to some kind of
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normal as quickly as it did no I didn’t
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expect it would it would happen that
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quickly you know a lot of that was the
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fact that the government backstop the
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system and once the become a backstop
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the system it was what the financial
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markets did come back but the banking
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system has been changed so in the book
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and the film it becomes very clear that
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you’re you betting against the subprime
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mortgage market is not
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just a trade but it’s kind of a moral
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crusade are you still on this moral
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crusade I’m not because a lot has
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changed
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you know dodd-frank I think really fixed
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a lot of things leverage has come down
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enormous ly the Consumer Financial
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Protection Board has been put in place
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to protect consumers I the world’s very
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different from what it was pre-crisis
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hmm but now many of these things are
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threatening I mean Donald Trump has
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promised to repeal vast parts of the
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dodd-frank act for example it’s not
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something I’m in favor of I think that
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will be a big fight you know it’s
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possible the industry is going to get
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deregulated to a degree we’re not going
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to go back to what we where it was so
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for example you know Citigroup used to
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be levered 35 to 1 today its levered 10
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to 1 I feel if we go into some type of
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deregulation maybe you get 2 to 3 turns
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more leverage it’s not something that
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I’m personally in favor of but I don’t
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think it’s a calamity hmm so do you
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think with Donald Trump be president
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today if more than one banker had gone
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to jail for the financial crisis it’s an
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excellent question and the answer is I
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don’t know you know I don’t know
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I’m cold about it I’ve thought about it
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a lot
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I think there’s a definite very strong
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sentiment that it was wrong that nobody
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went to jail I’m not going to say if
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that sentiment is right or not but
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there’s definitely a very strong
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sentiment in the country that that’s the
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case and I think people are very angry
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that nobody did go to jail again I’m not
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going to say whether that’s right or
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wrong and if people had gone to jail I
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think that would have soothed some of
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the hangar that was seen in the election
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so it’s possible that impact of the
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election but it’s impossible it’s
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impossible to say right so now taxes are
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going to be can’t and Finance regulators
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because the populace to campaign against
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Wall Street 1 correct correct okay so
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what do you do with investment then I
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hear you you are investing quite a lot
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in bank stocks well I mean there’s
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there’s two issues there’s what I think
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about finance the financial system and
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what I think about financial stocks and
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the two don’t necessarily
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correlate so with respect to the
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financial system I think that what’s
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been done has been a good thing but it’s
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been very intense bank the dodd-frank
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act and the Fed forcing people to
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de-lever to de-risk etc so from a
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financial system I’m very happy I could
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say very strongly the United States
financial system has never been held
this healthy in my lifetime but it’s
been very painful for financial stocks
because as you de-lever and do risk you
make less money and therefore it hurts
your stock price so the last six years
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or so have been extremely painful for
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financial stocks especially banks as
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they’ve de-levered and dearest well if
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we’re going to go into world where we’re
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going to deregulate and leverage is
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going to go up at least some just
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reverse the story
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so therefore financial stocks should do
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well right okay
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like I said financial system financial
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stocks but you are not necessarily the
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same an interest rates in America are
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going up yes that’s very good for banks
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all right
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so America is kind of moving from a
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monetary stimulus to a fiscal stimulus
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with something but it’s like that’s
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something I’m in favor of yes I think
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it’s a good thing the infrastructure
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investment yeah that’s right until not
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believe that quantitative easing is a
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successful strategy why not there are
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too many negative impacts for from it to
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I mean look it was a noble experiment
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there was no fiscal expansion there was
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no other game in town so I don’t blame
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the Fed for doing it the idea was that
lowering rates would cause people to go
up or out on the risk curve and vest in
the economy and really the other thing
happened was they went out on the risk
curve by buying back their own stock
they didn’t really invest in the economy
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and with lower rates that hurts consumer
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because they makes us money we pay the
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money in the bank so I haven’t you know
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when we started the monetary policy of
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quantitative easing
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us growth was one-and-a-half to two
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percent and after we did it it’s one and
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a half to two percent so in my view
quantitative easing is a failure
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alright so in November you said to the
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Guardian in Europe but Europe is screwed
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you guys are still screwed referring to
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their non-performing loans in the
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Italian depends of the country yes
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are we in Europe still screwed well my
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wife wish I hadn’t said that
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yes so okay oh we in big trouble not big
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it depends on the country you know Italy
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has a very large non-performing loan
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problem I don’t see the Italian
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government doing anything to really
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solve that problem if they like before
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Christmas that was a nasty suppose that
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was just monte de Paz yeah and you never
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like to say monte de Partie because it’s
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such a great name and the world’s oldest
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bank as the world’s oldest bank correct
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and I don’t you know you could try and
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Simmel to deposit ten times fast it’s
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very hard but it’s not really solving
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the problem I mean this is something
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called a Texas ratio which is a ratio
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that bank analyst Achon myself compute
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which is non-performing loans divided by
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tangible book value plus reserves
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basically the numerators all the bad
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stuff divided by the money you have to
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pay for the bad stuff and one of the
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great lessons about bank analysis is
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that one in Texas ratio gets over a
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hundred percent the bank is done and in
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Italy the two largest banks are in paisa
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and you credit and their Texas ratios
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are at ninety percent and every other
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Bank in Italy is over 100 percent so I
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don’t envy Italy the problem ok famous
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ahma is the country there’s the bigger
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than I think it won’t come and I think
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the problem with the banks generally in
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Europe is that they are still under
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capitalized and they they are they do
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not make enough money per dollar
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employed basically European banks don’t
charge enough for this
services they never have and they’ve
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 quite the same
well don’t you make sort of the poster
child for that let’s think about this
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this way so today if a bank has a 1%
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return on asset and is loved or ten to
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one the return on equity is 10% that’s
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the simple formula so you know Citigroup
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for example doesn’t even have a 1% ROA
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but they’re not that far off but
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Deutsche Bank today has a 30 basis point
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ROA they need to improve their
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profitability by more than three times
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there’s no way Georgia Bank on its own
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can improve its profitability three
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times the entire European banking system
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has to be price you know how that’s
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going to ever happen I don’t know but
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until it does your paint banks it could
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be a problem
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they’re going to be a problem so you’ve
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been in here in London for a few hours
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now and you must have realized already
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that the only thing people talk about
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here with breakfast yes
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so what financial risks do you see
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coming from brexit big question is a big
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question
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okay what will happen in March I have no
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idea you have no I really have no idea
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honestly I don’t think and more
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importantly anybody else has any idea
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that it’s going to be an adventure a not
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so it’s going to be a fun adventure but
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it’s going to be an adventure so you
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said that we’re very bad at dealing with
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crises that develop very slowly and you
put the blame on the big financial
crisis of 2007-2008 on income
distribution really do you see that
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changing at all I mean let me explain
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that yes because it’s not intuitively
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obvious how the two are connected so you
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know my thesis is that one of the
underlying causes of the financial
crisis it was bad income distribution so
you know when I say that people’s eyes
generally clays are like you know what
are you talking about
but I think that there’s a
cause-and-effect relationship in that
you know starting in the 90s when income
distribution started to get really poor
in the United States rather than focus
on that and what the solutions worth of
that problem let credit get democratized
that was the euphemism for will will
make loans to people that we didn’t make
loans to before so rather than get
people’s incomes up they let them lever
themselves [take out more debt] and one of the ways people
lever themselves was by taking out loans
on their homes and loving themselves
that way and so I think one of the
causes of the subprime mortgage crisis
is that you know post dodd-frank hard to
get a mortgage loan yeah you know
incomes have only started to start
growing again we’ll have to see what it
does the new administration can do
anything hmm
so it don’t Frank it’s harder to get a
loan but well it’s hard to get a
mortgage why although I don’t think that
I caused a defect of dodd-frank I think
it’s more of an effect of all the fines
that were imposed on the banks for the
mortgage crisis and so the banks I think
not unjustifiably are kind of worried
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about making mortgage loans that they
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might they might not should or should
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not make so the financial crisis what he
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said the main problem was the products
12:22
the tools available or the culture ah I
would say is one of the unsung aspects
of the financial crisis that people have
definitely not written that up about
which is psychology yes and what I mean
by psychology is you have an entire
generation of Wall Street executives who
grew up in the 90s in the early aughts
who really only had one experience which
is they made more money every single
year now what they didn’t really notice
was that as they were making more money
every single year the leverage of their
various institutions was increasing
every single year
now they thought they were making more
money because it was them but really
what was happening as they were making
more money because their institution was
becoming more levered and really what
happened was they mistook leverage for
genius
I wrote that sentence by the way I read
that I do it’s a good son it’s a good
sentence I don’t write a lot of good
sentences but that’s definitely one of
them tweetable yes it’s very good right
if I tweeted I would tweet listen I am
so let’s imagine you went to a Wall
Street executive in circa 2006 and you
said to the CEO of you know pick the
name of your institution and you’d say
dude listen the entire paradigm of your
career is wrong you have to de-lever so
did you ever have a conversation like
that I did I’ve never told this story
before there’s like AI now it can be
told story okay um so the day is
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
them anyone else today but it wouldn’t
matter because I would have had the same
it would have been the same conversation
with any of them
given what was discussion one so I sit
down with a head of risk management of
one of the big farms it’s one month
before Bear Stearns almost to the day
and I say to him you have got to de-lever
and you’ve got to de-lever now because
Armageddon is coming the point of it is
the direct that’s almost a direct quote
I used the word Armageddon and he looks
at me and he says you know I hear what
you’re saying but you know we at X we
can be much more levered to the bank now
back then there was a bank based in
Detroit called net city it was a
medium-sized regional bank and it had a
lot of subprime mortgages so it was a
bit of the topic of the day and so I
said to him you know do you know what
happens if knacks City goes down and he
says no what happens I said nothing the
regulator’s come in they seize the bank
they pay off the depositors they fix the
bank they sell the bank the government
takes something of a loss end of story
do you know what happens if your firm
goes down planet earth burns who should
be more levered and he looked at me like
I was speaking ancient Greek like he
just it was so outside his paradigm it’s
like he didn’t know I was talking about
and I realized it was over that there
was no way these guys were going to do
what needed to be done before the world
blew up but I think we’re going to see
someone to go to jail right
I mean you can have to break up the bank
partido I don’t know I don’t know I have
a feeling in a few years people are
going to be doing what they always do in
the economy tanks they would be blaming
immigrants and poor people it’s not X
equate from you is that Hollywood’s a
great quote it’s a great mark it’s not
yellow it was written by Adam McKay with
the author and director and but did you
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think in those terms back then oh I
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always think in those times always
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thinks in terms of disaster yes why is
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that just I have a very strange DNA do
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you see this paradigm changing at all
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this culture I was told check it steady
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change they’ve been beaten to a pulp
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yeah
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you know the dodd-frank gave much more
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power to the Fed to regulate the banks
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that power was put in the hand of
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Governor Daniel Tarullo and I think he’s
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done a tremendous job of de-levering the
17:03
banks in the United States you know I
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would say the CEOs of the bank’s fought
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him kicking and screaming but I’d say in
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the last year or two they gave up and I
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know you said before that Europe’s done
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not as good of a job with that that’s
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correct why well it’s what your starting
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point so you know just pre-crisis
17:29
Citigroup is levered thirty five to one
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deutsche bank is lowered over 50 to one
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so today’s Citigroup is levered ten to
17:37
one and deutsche bank depending on how
17:40
you calculate is probably levered twenty
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five to one so everybody’s leverage is
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lower European banks have always been
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much more levered than US banks so
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they’re still more levered they just
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left levered than they were right not
17:57
they’re not de-levered enough to my taste
17:59
yes
18:00
but that again we gets back to the Paula
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Mills they’re not profitable enough per
18:05
dollar employed so the regulator’s in
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Europe let them be more levered I think
18:10
it’s a mistake but that’s the way the
18:12
systems it works okay and everyone’s
18:16
asking you what the next one of the
18:17
crisis is going to be so I don’t have a
18:19
dick I know I’m not going to ask you
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money I will ask you that question I say
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you know everybody’s trying to pick the
18:28
next big short and I’ve done that
18:30
already I’m in no rush
18:31
okay thanks a lot Steve Eisman thank you