Steve Eisman on Banks, AI and His Next Big Bet

Tracy Alloway (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:15)

And I'm Joe Weisenthal.

Tracy Alloway (0:16)

So Joe, this is a very special live recording.

Joe Weisenthal (0:19)

I'm really excited about this one. I always enjoy live recordings. We talked to our guest recently, a few months ago, and a lot has happened since then, so plenty to... Really?

Tracy Alloway (0:30)

All right.

Joe Weisenthal (0:31)

Let's just jump right into it.

Tracy Alloway (0:32)

Yeah, you've given it away, Steve, but we're going to be speaking with Steve Eisman. He is, of course, a senior portfolio manager over at Neuberger Berman. So thank you so much for coming back on the show, Steve.

Steven Eisman (0:41)

Oh, thank you very much.

Tracy Alloway (0:42)

So let's see. The last time we spoke to you, you seemed okay about the banks and you also thought...

Steven Eisman (0:48)

I don't know if I would say okay.

Tracy Alloway (0:50)

Well, all right, let's talk about what happened since then. What did we just see in the financial system?

Steven Eisman (0:56)

So if I could sum it up in like a sentence, because it's always pretty good to try and sum it up in a sentence, I'd say we're not having a banking crisis, we're having a crisis of certain banks.

That's like a really good fricking line, so pay attention.

So I mean, the saying goes, the generals always fight the last war. The last war was credit quality and capital, which that problem was solved. The problem with Silicon Valley was that the correlation between all their depositors was essentially one. In other words, they were all the same. It would be as if you had one depositors with $150 billion in the bank.

And what happened was Silicon Valley had a very simple business model. They just took in deposits from VC and they bought bonds. That was it. They made very few loans and gave great service.

And so when rates were at the bottom, they bought long-term bonds at subterranean rates. The Fed starts raising rates, who knew? And all of a sudden they have massive mark to market losses in their portfolio, which essentially wiped out their equity. But that's not enough because you could always hold the bonds to maturity, unless you got to sell the bonds. So if you remember last year, the stocks that were down the most were the companies that had high revenue growth and negative earnings. They were down anywhere from 75% to 90%.

That characteristic is the same thing as venture capital companies. So venture capital couldn't raise any more money. The venture capital companies had to pull their deposits out of the bank. Eventually Silicon Valley ran out of liquidity. They sold their bonds and the rest is history. Thank you, Peter Thiel, for causing a panic. And the next morning, they were done. That was essentially the story. So after that, everybody basically started shorting every single bank. The bank that had the same characteristics as Silicon Valley, Signature, which went that same weekend, First Republic, PacWest, Western Alliance. Obviously First Republic is gone. You know, probably this part of this crisis is largely over. There's a problem with the earnings of the banks, but I don't think it's unlikely, I think, at this point, that anybody else is going to go under.

Joe Weisenthal (3:25)

Well, you mentioned and, you know, the generals always fight the last war. And so people weren't paying very close attention to deposit or correlation, it would seem. The supervisors, apparently not.

And then, of course, you know, people were not concerned. They're like, oh, credit risk is solved. And then maybe they weren't so aware of the rate risk lurking on the balance sheet.

Steven Eisman (3:45)

Well, the problem was they don't read the research. If they read the research that's out there, they would have known the losses to the dollar. But it's in my experience that regulators don't read Wall Street research and they try and find it out on their own. It's a lot easier just to read the research.

Trust me.

Joe Weisenthal (4:04)

So from your perspective, though, it was out.

Tracy Alloway (4:07)

There's no question.

Steven Eisman (4:08)

There's absolutely no question. There's absolutely no question that the investment community knew what the losses were on Silicon Valley's portfolio to the dollar.

Tracy Alloway (4:18)

Well, can I ask? I mean, let's say we have a Fed meeting coming up, obviously, and there's a lot of debate over whether they're going to pause or hike again. But if they hike again, how problematic would that be for the banking system now?