31: Welcome Aboard Starship Bank

Joe Weisenthal (0:08)

Hello, and welcome to another edition of the Odd Lots Podcast. I'm Joe Weisenthal, managing editor at Bloomberg Markets.

Tracy Alloway (0:14)

And I'm Tracy Alloway, executive editor at Bloomberg Markets.

So Joe, I'm really excited about our guest for today's show. He is one of my all time favorite banking analysts, a guy called David Henler.

Joe Weisenthal (0:28)

Why do you like this analyst so much? What is it about his work that separates him from other banking analysts?

Tracy Alloway (0:35)

All right, well, David was known for working at this research shop called Credit Sites. I don't know if you've heard of them. They have a bit of a bearish bias, some people would say.

But what David did really well is in the run up to the financial crisis, he spotted a whole bunch of the risks in the banking system that not that many other people saw. And then after the financial crisis, he was one of the banking analysts putting out some really, really interesting research out on the business of being a bank, what was permanently broken and what could be fixed.

Joe Weisenthal (1:09)

Yeah, this has become a really big topic.

People have been talking about this for a while, but in the last several months, it seems like there's been this big surge in people talking about this question of, is the traditional banking business model structurally flawed? In other words, not just a slow recovery from the financial crisis, but some sort of permanent impairment.

Tracy Alloway (1:32)

Right, this is the classic structural versus cyclical debate. Are things like fixed income, the bond trading business, gonna come back, or has something permanently changed that means they're basically dead forever?

And we're definitely gonna ask David how he feels about that.

Joe Weisenthal (1:49)

Well, this is a huge question because there's so much riding on the health of the bank. So much money is in the banking sector, so much wealth.

And so this question of can the banks actually recover or are they doomed to be much smaller than they were in the early part of this century is absolutely massive. So I'm looking forward to getting the answer.

Tracy Alloway (2:19)

All right, here is David Henler. He is the former banking analyst at CreditSites, and he is now founder and principal at his own Risk Advisor of Viola.

David, thanks so much for being with us.

David Hendler (2:31)

Thank you for your time.

Tracy Alloway (2:33)

So I suppose to begin, you built this reputation as the guy who saw a lot of the risks coming before the financial crisis. How did you manage to do that?

David Hendler (2:45)

That's funny you should ask. Yes, basically, I started on the buy side at a conservative life insurance company, New York Life.

And they taught me some very good old age investment principles, where credit analysis was emphasized, and being, I guess, cautionary or skeptical when new issue bonds were sold to investors, institutional investors, or secondary bonds were sold, to be a little skeptical, and not just take the up case, stress test it for the down case, and then if you felt comfortable, and the spreads were, and yields were amenable, you would do the deal. So I think it's my early days on the buy side in the early to mid 80s.

Joe Weisenthal (3:38)

So what did you see prior to the crisis specifically that others were missing?

David Hendler (3:44)

Well, I had been doing bank and finance analysis probably for close to 20 years. So I saw a couple of cycles. I saw the 1980s energy bust, and real estate bust in Texas, New England, California, and the SNL debacle of the 1980s.

And then I saw the tech wreck of the early 2000, 1999 So I kind of understood how things that looked too good to be true usually were. And you try to get ahead of the decline by writing reports and warning your customers or investor base about the upcoming difficulties.

Then as it plays out, try to figure out if there's a risk-adjusted return opportunity on the upside. Once most people see it and they sell out and they're overly worried, because they just thought it never could be this way before. Kind of like the real estate markets are so strong in New York City, in the luxury area, and people think it'll never go down. I think that's a negative signal there.

Tracy Alloway (4:58)

David, did any of your reports before the crisis get you into trouble? Because some of the stuff you were saying back then was really controversial.

David Hendler (5:07)

What do you mean by trouble? I mean, I would say that at times, companies, they wouldn't like it, and they would call me about it, or call people that I worked for about it. And usually, we just heard them out and that was it. So there was some friction. Investors didn't do that, I would say. I'd say it was more the companies I covered.