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Eisman Of ‘Big Short’ Says ‘Deutsche Bank Is A Problem Bank’; Vol Is Here To Stay

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Steven Eisman discusses the U.S. financial system and regulation and why he liks some banks and likes shorting others. He speaks with Yvonne Man from the CFA Annual Conference on “Bloomberg Markets.” Below is the video as well as an informal transcript of part of the talk

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Eisman Of 'Big Short' Says 'Deutsche Bank Is A Problem Bank'

Eisman of 'Big Short' Is Short Deutsche Bank, Canadian Financials

May.14 -- Steven Eisman, managing director at Neuberger Berman, discusses the U.S. financial system, problems he sees with Deutsche Bank, and his biggest shorts in today's market. He speaks with Bloomberg's Yvonne Man from the CFA Annual Conference on "Bloomberg Markets."

en years ago when you were here I mean this was a year before the crisis happened before the Lehman collapse. What's the biggest change you see now versus that in the financial system the United Sates has changed radically. Leverage has been reduced enormously. Risk has been reduced enormously in the banking system. You know I think the regulators and is actually the very good job postcrisis and for the first time in all the years that I've covered bank stocks like them I was just I think the financial system of the United States is safe. Yes. You said you sleep better at night. But you know do you think banks globally are generally in better shape now. I mean you talk about how things were too big to fail back then. We see the balance sheets of many American banks have now ballooned as well Chinese banks are the largest in the world.

Do you think we fix the structural issues now. I can only speak about the United States being in far better shape than it was. I'd say Europe is better but not good enough. I think Canada is OK. I think it is going to have some issues with their housing market. I can't really speak to Asia. What about the human element of what really led to the crisis. I mean the greed factor of all this I think it was what he said recently as I said it seems like we're seeing a little more sanity and stupid in what we saw back then. Do you agree.

I think the incentive structures back then will warped the people who ran securitization desks were compensated purely on volume and I like to say about the financial crisis that we learned is that the incentives trump ethics every time and the incentives were poor. They're better now but they were very poor back home. You mentioned Europe can do little about are you. You've been pretty negative about some of these European banks. What are your thoughts now about Deutsche Bank and the others which I think they're still kind of in the thick of their problems right now.

You know Deutsche Bank has real profitability issues and spend money and technology in a very very long time. They're probably undercapitalised I think probably raise capital again next year. So it's a problem. I think it has to shrink dramatically with more consolidation you think in some of these European banks. I don't I can't speak to Europe where there'll be consolidation or not.

I think it's definitely going to be consolidation in the United States which is driven by how much companies like J.P. Morgan are spending on technology which is about 10 to 11 billion dollars a year versus much smaller amounts of regional banks. So the regions that have been merge to bulk up I know you don't look too much into China now but what do you think is you know if you talk about excessive leverage is that where we're going to see the root of it now and this time of the cycle. I mean what do you think China is in the cycle at the moment. I'm not going to comment on China.

I haven't studied China in a very long time and I don't think it be appropriate for me to talk about it. I'm talking a lot more about the biggest long opportunities right now. I mean you're very positive about the banks that high tech is also one of your big sectors as well. I mean what do you think is the biggest I guess opportunity for you in 2018. I think the biggest opportunity is that I think in long short is making a comeback. There are more ways to make money in the long side and on the short side whereas in the past it was purely on the long side since the crisis.

So there's more volatility. The volatility is here to stay.

And so running a hedge portfolio makes a lot more sense. What do you make of just I know you say you're not looking anywhere in the fixed income space right now is it because you're seeing bit more further repricing on just how much higher yields can go. I think look QE is over. Rates are going up.

I just don't see many opportunities in the bond market. I just really don't think you know call me in two years. OK well what about what we're seeing in the debt markets I guess. I mean there's statistics out there from the IMF recently that were saying U.S. debt to GDP projected to exceed that of Italy's by 2023 the threats that the financial system are rising the price of risky assets. They say you know the IMF was very bad predicting stuff going into the crisis. I'll pay particular attention to the IMF today. I'm not worried I like to I'm not a deficit fetishist.

So for example the US debt to GDP today is around 110 percent. Maybe it will be 120 percent in a few years or a hundred and thirty. Japan's is to 40 as low as 300 has low rates. So you know not that the deficit is the problem. The people who have been arguing about complaining about deficits are complaining about it for 30 years and the only thing that's happened during that time is that the price of that risk has gone down which is interest rates. So I think the onus is on them to show why the deficit's a problem. So do you think overall QE was effective QE was a failure. Why so.

Well, you know pre QE US growth was 1 to 2 percent. Post QE U.S. growth was one and a half to 2 percent. So it was a noble experiment. It didn't work. I think it didn't work because gave corporations incentives to buy back stock and it hurt consumers because they're not making any money to keep their money in the bank. So I don't think she was a success at all. Your biggest short play these days is all I know is that there's not many but what would it be. Short Canadian financials Short Deutsche Bank, short Wells Fargo. And then there are a few are there are there select opportunities. I mean I think there's a whole disruptor versus disruptive theme is going to last for a very long time. And there are a lot of ways to play that both long and short.

And of course you talk a lot about hedge funds in general and where they are going in particular has rejected the Bitzer 220 fee structure a bit more about just in terms of the lower fee products right now how are those performing. Well I have one product that has a much lower fee structure it has daily transparency it has daily liquidity as a flat fee no carry. It's performing quite well. I mean I'm not allowed to talk about the performance but the correlation to the S&P is quite low.

And you see the competition when it comes to these funds or you know interest in all these strategies right now do you think that that actually puts more pressure on fees and putting more pressure on fees in the hedge fund will be bloodless and 10 years from now the fees will be significantly.

Steven Eisman
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