FROM BIG SHORTS TO BIG LONGS
Ten years on, man who predicted housing’s collapse reflects on crisis
Steve Eisman saw it coming. A decade ago, he was among the few who figured out something was amiss in the U.S. housing market, and famously found a way to bet against it, earning him a prominent role in Michael Lewis’s financial crisis classic The Big Short. Now a fund manager at Neuberger Berman in New York, Eisman recently spoke to the Financial Post about the crisis, its aftermath, and how he’s investing now. This interview has been edited and condensed.
Q This Saturday (Sept. 15) marks 10 years since the collapse of Lehman Bros. What has been the most significant change you’ve seen in global markets since then?
A I think the biggest change, at least in the United States, is how much more extensively and harshly banks are regulated. Let’s use Citigroup as an example. So just before the financial crisis started, Citigroup was levered about 33 to 1. Today, it is levered about 10 to 1. That is, in my world, like comparing the distance from Mercury to Pluto. It’s such an enormous change it’s hard to even describe it. I can honestly say for the first time in all the many, many years that I have covered the financial services sector, I actually think the banking system in the United States is safe.
Q How do you think history will judge the Fed’s response to the crisis?
A If I had to give it a grade, I’d say pre-crisis I’d give the Fed an F. And I would say that Alan Greenspan will go down in history as the worst chairman of the Federal Reserve in the history of the United States. I’d say, during the crisis Bernanke did a very good job, I’d give him a B or B+, and that’s what I think about how they did.
Q And post-crisis?
A I think they did a very good job regulating the banks under the leadership of Daniel Tarullo. Q What’s surprised you as an investor in over the past decade?
A I think what surprised me most about the markets was how quickly they recovered and how quickly people forgot what happened.
Q Why do you think that happened?
A I think that’s a function of the fact that the Fed embarked on this great quantitative easing experiment. There were three QEs. QE1 took place in the spring of 2009 when markets were just dead. This was very successful and so the fixed income markets went back to normal. And then two years later, the Fed decided that, hey, interest rates are zero, the economy is really not growing, we’re worried we going to go back into a recession. So they went out and bought U.S. government bonds and mortgage bonds backed by Fannie Mae and Freddie Mac, and the idea was they were therefore removing trillions of dollars worth of risk-free assets from the marketplace with the idea that would force both investors and companies to go out on the risk curve. The idea was that that would somehow get companies, for example, to build factories and hire people and that would get the economy growing faster.
Q And that wasn’t as successful?
A In my view it failed, 100 per cent. It caused the stock market to go up because people took all that liquidity and invested it in the stock market, but it did not cause the economy to grow even 10 basis points faster. I like to nickname quantitative easing monetary policy for rich people. You could quote me on that. You know, they took a shot; it didn’t work. And then they doubled down and did it again. Same result. Q From a global perspective, what is the biggest risk today that people aren’t talking about?
A I’m pretty sanguine these days about the U.S. economy. I don’t see any real risks out there. A lot of the things I usually look at that would tell you there might be a problem — like changes in credit quality — are not showing any signs of stress. And I think the only real threat is some sort of global trade war. Q Where will the next crisis come from?
A I think it’ll come in the corporate sector because I think that’s where a lot of the debt’s been issued. It’s not going to come from the consumer sector. But you need a real slowdown in the economy for that to happen. Q When you look back at the crisis of 2008, do you think of it as “lesson learned”?
A Well, lesson learned in the sense that the banking system is much less levered than it was. But other people are more levered, so we’ll see how they do next time around. But whatever happens, it’s not going to be a systemic issue. Let’s make a hypothetical, say there’s a recession and let’s say a lot of these high-yield companies go bankrupt. That’s not a systemic problem, that’s a problem for the people who own those bonds. If you ask yourself what made that crisis different, there were four elements to it. There was too much leverage, a big asset class (residential real estate) blew up in everybody’s face, important firms owned that asset class, and number four was derivatives, like credit default swaps, that tied balance sheets of all the institutions together. So this one bank went down, another bank would go down. Today, they’re less levered — maybe some of them will own some of an asset class that blows up but since they’re less levered it’s not going to destroy them.
Q We’ve been talking about big shorts for 10 years now. What is your favourite long idea?
A I think there are certain companies in the U.S. that are kind of oligopolistic, that are big data stories, where they control the data that they sell, and there’s very little competition. There are three companies like that in my portfolio. Equifax is an example, but there are a few others that have massive databases and because it’s so expensive to recreate what they have, there can only be a few companies that do it. Google controls a lot of data but it’s a different kind of data. It’s not the same thing. The best predictor of consumer action is the databases that the consumer credit bureaus have of their credit behaviour. It’s every loan you have, and whether you’ve paid monthly on everything that you’ve ever had. It’s the best database I know of.