Wednesday, April 24, 2019
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Steve Eisman's Big Brexit Short

Finance Manager Steve Eisman has known to predict the bubble of the mortgage debt bubble in 2007-2008, one of the few that believed such a black swan event was possible. A decade later, the "Big Short" star has returned with a bearish bet against two unnamed British banks that he believes would suffer from a no-deal Brexit.

While this is not a Black Swan territory, with many people preparing for Britain and the EU not agreeing to deduct terms, it is still worth keeping an eye on Eisman.

At a weekend conference in Dubai, he preaches converts in many ways. According to surveys by Bank of America Corp. The UK has become one of the least popular countries in the world for equity investors. The shares of the Royal Bank of Scotland Group, Barclays Plc and Lloyds Bank Plc have fallen between 2 and 2, 18 percent since the Brexit vote.

Nevertheless, there may still be some complacency on the European financial markets – both in the UK and elsewhere – that have not been priced in appropriately.

First up is the question "No Deal". In recent days, hopes of a deal between the UK and Europe have risen, consolidating future trade relations and somehow answering the question of how to avoid a hard border between Ireland and Northern Ireland. These could still be smashed.

Bringing Brussels and Westminster to an agreement is hard enough, but getting a deal across a fragile and rebellious British parliament can prove impossible. That's the contingency that Eisman puts in, and it's not a crazy bet. Analysts at UBS Group AG, the Swiss bank, also describe the odds that UK lawmakers reject an agreed deal as "non-zero."

And while Eisman has opted for two banks, the threat to the broader financial industry is also considerable. Banks that depend on the smooth running of stock exchanges, clearing houses and cross-border derivative transactions will attest to this, hence their expensive planning for the worst-case scenario. And this happens at a difficult time for the once-boring world of derivatives clearing, which has become a focal point between the US and the EU as Brussels seeks to strengthen its global oversight.

In addition, for the UK's lenders, there is a risk which monetary policy the Bank of England might pursue – whether we end up with a no-deal Brexit or a divorce. There is pressure to keep the taps open to prevent economic damage. If history is a clue, lower interest rates would inevitably lead to further erosion of British banks' margins.

It's important to know that Eisman does not predict systemic chaos. Major UK banks have financial requirements such as US dollar revenues generated abroad and balance sheets that can protect market share and absorb credit losses. Maybe he has smaller listed banks in mind that are less well prepared. Even more worrying is the prospect of a left-leaning Labor government led by Jeremy Corbyn. However, as a corrective measure against this week's UK political optimism, this is a useful intervention.

To contact the author of this story: Lionel Laurent at

To contact the editor responsible for this story: James Boxell at

This column does not necessarily reflect the opinion of the editors or the Bloomberg LP and its owners.

Lionel Laurent is a Bloomberg Opinion columnist for finance and markets. Previously, he worked at Reuters and Forbes.

© 2018 Bloomberg L.P.


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