- REUTERS/Benjamin Myers
Carson Block of Muddy Waters Research just announced a huge new short at the Sohn Conference.
Block said that he is short Bank of the Ozarks because of its exploding construction-loan business.
Block said he does not believe in Santa Claus, 7% GDP growth in China, and the Bank of the Ozarks business model.
The biggest issue for Block is the unfunded off-balance-sheet loans.
Essentially, Block is of the opinion that the bank is lending out more money than they can support in off-balance-sheet construction.
The bank goes out to builders and offers them loans for the future, which secures funding for the builder and also allows the bank to deploy capital it has through deposits.
According to Block, about 90% of the bank’s loans are real-estate loans with 30% of the total being for construction loans. By building up unfunded loans, the bank has to continue earnings growth in order to fund a growing pile of speculative loans.
“That’s easy we’ll go out and acquire banks, sell off the assets, and then we can use the deposits,” said Block. “This works well when you’re a growth stock, but when it slows down then you have a problem.”
In addition to the business issues, Block called out the “seeds of hubris” among management. Block cited a quote from Ozarks CEO George Gleason, saying that the top 10 “guys” from Ozarks could “match up” with the top 10 “guys” from JP Morgan and Gleason would feel as if Ozarks would come out on top.
The stock tanked during Block’s speech falling more than 6%.