By Lori Leonard Reyman
For the first time in 20-plus years working on Wall Street, the investment expert on whom the movie “The Big Short” was based is sleeping easy. “This is the first time in my career where I go to sleep, and I do not worry at all about the security of the financial institutions in the U.S.,” said Steve Eisman in his keynote speech at the 10th annual Land Investment Expo held in Des Moines last month.
Eisman, who now serves as managing director and portfolio manager at Neuberger Berman, is one of the hedge fund managers who predicted, and profited from, the 2008 financial crisis. The book “The Big Short” by Michael Lewis was adapted into the Oscar-winning movie of the same name, released in 2015.
To illustrate the vast difference between today and the run-up to the late 2000s housing crash, Eisman contrasted the global bank Citigroup’s financial footing then and now. In 2002, he said, Citigroup’s balance sheet reached $1 trillion, a level that took 100 years to achieve, and it was leveraged at 22 to 1. In 2007, Citigroup grew to $2 trillion, leveraged at 35 to 1.
Stable financial environment
“There's a big psychological aspect to why that happened,” Eisman stated. “It’s because there’s an entire generation who grew up in the 1990s and 2000s who had a very strange experience: They basically made more and more and more money every single year. They thought it was them. But leverage was going up. They mistook leverage for genius.
“I knew we were going down the rabbit hole,” he said. “In 2006, credit started to get worse and worse, and by the summer of 2007, it was so bad the machine stopped.”
Today, Citigroup is leveraged at a soothing 10 to 1. The difference between a financial institution leveraged 35 to 1 versus 10 to 1, Eisman explained, “is like the difference between the distance from Mercury to Pluto.” That type of leverage ratio is the equivalent of warm milk and sheep counting to a fund manager, and as Eisman looks to the horizon, he sees no “big bubbles out there.”
A stable financial environment benefits all business sectors, and this is especially true in agriculture, said Iowa Secretary of Agriculture Bill Northey, who also addressed the expo. “Stability means more predictable planning,” Northey said. “There is enough uncertainty in agriculture, so to the extent that uncertainty in finance and banking can be minimized that allows farmers to put more focus on other areas of their operation.”
Tax reform in driver’s seat
Both Eisman and Northey look to tax reform as an important driver in the economy going forward. “I would hope lower marginal tax rates would be part of any reform,” Northey said. “Lower tax rates are good for the economy in general and help contribute to economic growth, which can help build demand for our agricultural products.”
Grover Norquist, president of Americans for Tax Reform, said that under the current administration and Congress, “tax reform will be done inside reconciliation.” In 1985, at the behest of President Ronald Reagan, Norquist founded the taxpayer advocacy group, which opposes higher taxes at the federal, state and local levels.
“President Trump and the House are moving closer and closer towards each other. They agree the death tax will finally be gone forever,” Norquist said.
The estate tax has a 150-year history of ebb and flow coinciding with U.S. war involvement and was first instated to fund the Civil War. Norquist said that while he’s certain the death tax will finally die under the current administration, corporate income taxes “are up for grabs.” Section 1031, which allows tax-free or tax-reduced, like-kind exchanges of investment assets, “may be dropped in whole or in part,” he added. “It’s being discussed now.”
Northey looks forward to the day when farmers are no longer burdened by the estate tax. “I would hope permanent repeal of the death tax would be part of any tax package,” he said. “Transferring assets from one generation to the next is a concern with any business. The huge capital investments that are part of a farming operation make this especially true in agriculture.”
Norquist stressed that rewriting the tax code isn’t something that just started happening the day President Donald Trump moved into the White House. Some in the media would have you believe “Trump got elected and the world just changed,” Norquist said. “That’s not exactly what happened. This tax bill has been being written for five years.
“I want to see the day when there are no capital gains taxes,” he continued. “I think taxing income at one rate is a good idea, not taxing it several times as it passes through your life.” Still, the form the reform ultimately takes remains to be seen. “My sense is that it could go either way,” Norquist said.
In answering an audience question about whether the truly important issues like health care and tax cuts will get diluted by what the questioner characterized as the president’s “fight-a-day” plan, Norquist advised: “Don’t get distracted by the shiny things. You are looking at a [president] who throws out shiny stuff to distract the other team.” Every day while the press is “chasing the fairy dust,” Norquist added, the administration and Congress are having meetings, working to repeal Obamacare and reduce taxes. “Bunches of serious grown-ups have been working on these things for a long time. This is all congealing now.”
Reyman writes from Holstein.