Short sellers target Canadian banks, but one says, “This is not ‘The Big Short: Canada'”

Steve Eisman, a fund manager who profited from the U.S. financial crisis a decade ago, says Canada's housing market won't collapse
March 24, 2019 03:55PM

Cast of “The Big Short” film: Steve Carell, Ryan Gosling, Brad Grey and Brad Pitt; and the book’s author Michael Lewis (Credit: Getty)

A fund manager who profited during the U.S. financial crisis a decade ago is one of a growing number of short sellers betting that the share prices of the largest banks in Canada will fall.

Among the short sellers is Steve Eisman, a portfolio manager at Neuberger Berman who gained fame from The Big Short, a book about him and other short sellers who collected massive profits from the collapse of the U.S. sub-prime mortgage market.

Eisman took short-sale positions last year in the stocks of multiple Canadian banks that he declined to identify. Other investors see the same trading opportunity. New York-based S3 Partners reports that short-sale positions against Canadian banks are now worth US$12.3 billion, up 19 percent since the start of the year.

Short sellers have targeted TD Bank of Toronto more than any other major Canadian bank. Short positions against TD Bank shares total $3 billion, up 17 percent so far this year. Short positions against the shares of Toronto-based CIBC have increased 26 percent this year to $2.3 billion while bets against Bank of Montreal have jumped 37 percent to $1.3 billion, according to S3 Partners.

But Eisman said he doesn’t expect Canada to experience a financial crisis like the one that enveloped the U.S. a decade ago.

“This is not ‘The Big Short: Canada’ – I’m not calling for a housing collapse,” he told the Financial Times.

Weakness in the Canadian property market is a major cause of the increased short selling, according to Ihor Dusaniwsky, managing director of predictive analytics at S3 Partners.

New-home prices in Canada fell year-over-year in January for the first time since 2009, pushed lower by more stringent regulations on mortgage lending, new taxes on foreign buyers of Canadian homes and a faltering national economy.

In the last several years, Canadian property prices have risen at a faster pace than Canadian income, due to a lack of discipline in loan underwriting and low interest rates, among other factors.

The Canadian central bank has downsized its prediction of the national economic growth rate for 2019 to 1.7 percent from 2.1 percent. The Bank of Canada also has joined other central banks around the world in adopting an easy monetary policy by holding interest rates unchanged after five increase since July 2017. [Financial Times]Mike Seemuth