Steve Eisman, who was one of Michael Lewis’ correct doomsaying investors in The Big Short, is a renowned bank expert, now at Neuberger Berman. This week, CNBC’s Melissa Lee interviewed him on the 2023 bank crisis, Fed strategy, rates, and the tech sector. Every word Eisman says is important and useful, so I’ve recapped it below for posterity. Huge props to Melissa for teeing him on the right topics. I bracketed areas where explanation or context is warranted, and bolded certain hot topics. Links to CNBC original and CNBC Youtube clips are also below.
EISMAN ON US VS. SWISS BANK HEALTH
– “The large U.S. banks are better capitalized and have less risk than they every have in anyone’s lifetime.”
– “The European banks, while they’re not as well capitalized, they’re certainly better capitalized.”
– “That isn’t to say there won’t be pain if Credit Suisse goes down, but it’s not another 2008, thankfully.”
– “People have been pulling back from Credit Suisse for a long time. If the company goes bankrupt there will be losses. It’s not death defying losses. It’ll be a problem, it’s just not going to take down the system.”
– [NOTE: here’s a chart showing that pullback Eisman mentions.]
– “There’s a little PTSD from 2008, sell and ask questions later, which isn’t a bad strategy because the news is probably going to get worse.”
– “In 2008, when everyone was trying to get bailed out, the size of U.S. GDP was many multiples bigger than all the bank balance sheets combined.”
– [By comparison, as of today] “Credit Suisse balance sheet is $500 billion, and the GDP of Switzerland is $800 billion. So could Switzerland do something? Yes, but it won’t be easy — at all. Also, Switzerland doesn’t have a lot of regulators, so they don’t know a lot.”
– [NOTE: After this interview, Swiss central bank did in fact offer a lifeline to Credit Suisse this week.]
– “In Germany, there’s like 500 regulators in Deutsche Bank every day. I think — I could be wrong — the number of regulators for Switzerland is like 250 for the whole sector.”
– “Credit Suisse has been a problem child in the investment banking industry for as long as I can remember. It’ll get unwound. It’ll be painful, it’s only going to be painful for Switzerland. You heard today that maybe they want UBS to take it over. Believe me, UBS doesn’t want to take it over, that’s for sure.”
– “So I don’t know how they’re going to unwind it. They probably have to. Is it possible that they could save them? Maybe.”
– “But the credit default swaps blew out to like 800 basis points. That means you really can’t fund yourselves. I heard they were offering 6-7% deposit rates in Asia and people were still pulling their money.”
– “And nobody will be a counterparty anymore. That’s more than bad. That’s really bad. So how Switzerland will deal with this is anybody’s guess. I’m not in the room.”
EISMAN ON BANK REG WEAKNESSES
– “When president Trump passed that bill [the Economic Growth, Regulatory Relief, and Consumer Protection Act in 2018 that eased bank regulations] that raised the threshold from $50 billion to $250 billion [to be considered a systemically important bank], I think that was bad. I think Elizabeth Warren has a real valid point about it.
– [NOTE: here’s a link if you want to get into the weeds on regulator rules for systemically important banks.]
– We looked at the stress test for last year. The stress tests had about a line in it about rising rates. The rest of the entire stress tests were about credit. So even if Silicon Valley Bank had been been in the stress tests [they weren’t because their ~$200b in assets made them huge but 2018 regs exempted them from more oversight], given what the stress tests said, I don’t think the regulators would have caught it.”
– “The stress test is basically fighting the last battle. That battle has been won in the large banks. They’re better capitalized. Their risk even within that capital is much narrower. As Warren Buffett says, when the tide goes out you see who’s naked. This is a different tide.
– This is not a credit tide. Credit quality I think is really good. This is the tide of a mistake, which is some of the regional banks, especially those that have a lot of deposits above [the FDIC insured limit of] $250,000, bought long-term bonds at very, very low levels and have massive mark to market losses. That’s why Silicon Valley Bank failed. Also they failed because they had a very concentrated type of deposit base, which has a very big herd mentality.”
– The stress test for Silicon Valley Bank wouldn’t have detected any of these problems because the stress tests were looking for credit, not interest rate or concentrated deposit risk.
– “That’s what the stress test has been for the last 10 years.”
– This is a very specific problem of interest rate risk that may not come up for a very long time, but we have it now.
EISMAN’S IDEAS FOR INVESTORS
– “Let’s say the government doesn’t bail anyone out. Clearly JP Morgan and Bank of America benefit. And they did get bailed out [FDIC takeover], and it still turns out JP Morgan and Bank of America benefitted [by increasing deposits even more].
– “So our first thought was maybe we should buy JP Morgan and Bank of America. Then upon further reflection we thought maybe not because given everything that’s just happened, all the regulations are going to get much more stringent, making the banks much less profitable. And that’s not going to be clear for many, many months. So why be a hero because you don’t have any idea what’s going to happen.”
– This means we may be in a situation where nobody wants to invest in banks and stocks tank.
– “As a team we were looking at every single bank, and given the change in regulations, the best you can say is you don’t know. And if you don’t know, you shouldn’t play.”
– “We’re moving from one paradigm to another paradigm. So the paradigm of the last several years is rates are very low. You’re paid to take risk. You’re actually paid to take a lot of risk. What did the best of the last 10 years? High growth tech stocks. And what did the best within high growth tech stocks? Super high growth revenue stocks with negative earnings. What did the worst last year? Super high growth stocks with negative earnings. Now are people going to to back to that? I don’t think so, especially if rates stay up.”
– “So what I think is coming is: TINA is dead.”
– [NOTE: TINA is an acronym for ‘there is no alternative.’ It is often used by investors to justify a lackluster performance by stocks on the grounds that other asset classes offer even worse returns.]
– “I think you’re going to have a much more diversified portfolio. You can leave money in your money market portfolio because it’s over — or around — 4%. Over time, you’ll be able to buy some Treasuries and buy some bonds. And there are going to be a lot more themes than just tech: Infrastructure, bringing the supply chain back to the United States.”
– “You’re going to need to manage risk a lot more than people have. Who’s outperformed over the last 10 years: tech investors. The group is now so volatile, I think everyone should take their [tech] exposures down. I don’t think you shouldn’t invest in tech at all. But you really should diversify your portfolio.”
EISMAN ON RECESSION OUTLOOK
– “My team and I go back and forth everyday: Is there a recession? Is there not a recession? It’s a very uncertain time because we’ve never had the confluence of stuff we have today. And I think that argues for taking less risk.”
– “In the beginning of the year, good news was good and bad news was bad. And then in February, good news was bad and bad news was good. [because bad news meant slowing economy, which meant Fed slowing or stopping rate hikes]. And now let’s look at [the Fed meeting] next week [on March 22]: 50 basis points is off the table. So either they’re going to do 25 basis points or they’re going to do nothing.”
– “Let’s start with the nothing [meaning the Fed doesn’t hike overnight bank-to-bank lending rates]. I got calls today that because of Credit Suisse maybe the Fed will do nothing and that will be positive. And my response was: Really, you’re rooting for a financial crisis? That the Fed won’t raise rates? Maybe it’ll be good for a couple hours or a couple weeks. But the Fed won’t be raising rates because it’s scared. Well if the Fed is scared, you should be scared.”
– “On the other hand if the Fed raises rates in the face of this, even by 25 basis points, and says that we could still raise more, then you’re caught between a rock and a hard place [because higher short rates means banks have to pay depositors more than they make on loans which compounds bank strain, which makes economic weakness more probable]. Financial conditions have really tightened, but you still have inflation. It’s not clear either [Fed rate policy] move is good.”
EISMAN ON SHORTING BANKS & OFFICE REAL ESTATE
– “I don’t want to talk about individual shorts. Do I think the banking sector is still a short? Well it’s imploded. Would you want to short some of the bank stocks after they’re down 60-70%? You gotta have a lot of guts to do that.”
– “Do I think commercial real estate, well not commercial real estate — office real estate — is gonna be a problem? Yea, we do.”
– But the way these things unfold, it takes a long time. It really depends on each company, when their debt rolls over.”
– “If somebody bought that building 2 years ago with long-term debt at 3% and let’s say it’s 5 year paper, and in 5 years it’s going to roll over and it’s going to be 7%, that’s not good. But it really depends on each building and each company, how much debt they have rolling over.”