At the Milken Institute Global Conference in Beverly Hills, Calif., the one investment it seems worth yelling about is the opposite of the one that made many hedge funds billions nearly a decade ago. Call it the Big Long, or scream it.
That’s what Manny Friedman, chief executive officer of the hedge fund EJF Capital, did on Tuesday during an investing panel at the annual confab, which draws Wall Street dealmakers, hedge fund managers, politicians and policy wonks, in response to a comment from another hedge fund bigwig, Mitchell Julis of Canyon Partners. Friedman said his fellow panelist didn’t get it when it came to bank stocks. “This is the exact opposite of what was happening in ’08,” Friedman shouted. “The pendulum has swung all the way back.”
Friedman was far from the only one who was optimistic about the prospects for the banks. Financial regulation came up on a number of panels as an opportunity for both financial companies and the economy as a whole. Bank executives themselves were in a particularly optimistic mood. Still, Friedman, who said earlier in the week on Bloomberg Television that he had nearly 75% of his $9 billion hedge fund invested in small and midsize banks, seemed the most frustrated, including with the panel’s moderator and conference namesake Michael Milken, that others were not as enthusiastic about the Big Long as he was.
One of the main justifications for the Dodd-Frank rollback — which the Senate passed recently and Jeb Hensarling of Texas, the chairman of the House Financial Services Committee, said on Monday at the conference that he was ready to support — is that the number of banks in the U.S. has shrunk. Republicans, as well as bank executives and their lobbyists, often call Dodd-Frank the bank killer, though it seems clear the number of banks was shrinking long before the 2010 bank law was passed. Friedman, though, said the Senate bill, if passed in a similar form by the House, would lead to even fewer banks. A rule change in 2014 allowed small and midsize banks to count the debt of the banks they acquire as equity, something big banks cannot do, and that Friedman readily admits is crazy. On top of that, Friedman said the new Senate bill would tilt the playing field even more in favor of small banks, which he said would throw gasoline on the merger fire that is already starting to burn in the sector.
“It’s like owning a 7-Eleven that can be open all the time, and supermarkets are forced to close by 6 every night, are closed on the weekends and not allowed to sell liquor,” Friedman said. “You are going to make a lot of money in that 7-Eleven.”
Friedman, of course, is not worried too much about the negative policy implications. The bank shrink is supposed to be restricting the flow of capital and making it harder for business to borrow, though there is not a lot of evidence for that. Friedman said he was not too worried about that because the big players control about 70% of the capital in the banking system. Fewer small banks therefore should not restrict competition, even though small and regional banks are a key source of small-business lending as well as increasingly riskier commercial real estate lending, which a number of big banks have shied away from. But that raises the question of whether the Dodd-Frank rollback is truly needed in the first place.
Friedman said the best time to make money in banks was when there is a lot of volatility, or when there is, like now, a lot of regulatory pullback. “Sometimes Washington picks the winners for you,” said Friedman, which should give not just investors, but also Washington conservatives, who claim to be champions of a free market, something to think about.
