Dick Bove Sees a Financial Disaster Developing Bigger Than 2008

Rafferty Capital Markets Equity Research Analyst Dick Bove spoke with FOX Business Network’s (FBN) Maria Bartiromo regarding peer-to-peer lending and bank regulation. When asked about peer-to-peer lending being a hot space Bove said, "the U.S. government is actually prohibiting banks from lending money in certain sectors," and now we've got companies "who've come up with innovative ideas as to how to provide that money to people who need it." Bove also commented on regulation saying, "we have built so much risk into the financial system, that we're setting ourselves up for a disaster bigger than 2008."

Excerpts from the interview are below

On the reason peer-to-peer lending is such a hot space:

"It is a hot space because the U.S. government is actually prohibiting banks from lending money in certain sectors. In other words, low income households pretty much have been taken out of the market for banks. You cannot lend money to them and you can't lend money because of something called Operation Chokepoint, where the Federal Reserve and the Treasury have basically told banks you can't lend money to these businesses. And it goes all the way up to basically lending money on M&A, which is prohibited from the Federal Reserve on lending on leveraged loans. So basically, the fact that the government is telling the banks you cannot lend money in these specific areas does not mean that the need for the money goes away. And therefore we've got a whole series of companies who've come up with innovative ideas as to how to provide that money to people who need it, and a whole bunch of them will go public. And a whole bunch of them are going to capture the, I guess, enthusiasm of the shareholder."

On whether lenders are being regulated:

"They are not regulated. The issue is that therefore they are doing things that regulated companies cannot do in terms of risks. In other words, if you take a look at Lending Club, 90 percent of that company's balance sheets are loans. And all of those loans are what are considered level 3 loans, which means that they are highly questionable in terms of their value. And they're highly questionable in terms of their safety."

On taking big banks out of the equation:

"So basically, taking the big banks out of areas of risk, they opened, if you will, a black market. And we call a black market the shadow banking market, because it's totally legal. You open up a black market and you’re going to have mortgage companies. You’re going to have pawnshops. You're going to have payday lenders, all the way up through business development corporations, master limited partnerships, you know, REITs, you know, the private equity firms. All of these people are swarming into the financial area at the present time, taking the market share away from the banks and showing reasonably good performance. And in the short run, it will work and it's going to work good. In the long run, we have built so much risk into the financial system, that we're setting ourselves up for a disaster bigger than 2008."

On there being no protection for depositors:

"There's no protection whatsoever. In other words, what you're doing is you're going out to retail, if you will, I'll call it depositors. And you're selling them a note for $25, which means that you're reaching all the way down to the, if you will, smallest, if you will, depositor in the marketplace. And you're offering them something which he thinks he's going to get or she thinks she's going to get 8 percent on. And the backing of that is a loan that has not been underwritten. The loan is created by algorithms using some fancy computer systems which is exactly the problem that we ran into in 2008."

On seeing a good performance tomorrow when OnDeck (NYSE: ONDK) goes public:

"Absolutely. I think that what these companies are doing is they're not selling themselves as financial companies. My understanding is that they’re trying to stay as far away from financial analysts as possible. They're selling themselves as Internet companies that have found a new way to eliminate the banking system. And that's not what they are."

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