Hayman Capital's Kyle Bass Outlines How To Fix the Financial System

Recently, Hayman Capital hedge fund manager Kyle Bass was on CNBC talking about how to fix the financial system and also about sovereign debt and the possibilities of default. This area is definitely Bass' niche as we've covered his predictions of sovereign default back in May of 2009. In the video, Bass outlines how to fix the financial system by focusing on three talking points: OTC derivatives, bank leverage & reserves, and Fannie Mae/Freddie Mac.

Bass also goes on to talk about Japan and the United States as it pertains to sovereign debt issues. He calls Japan the 'canary in the coal mine' and says that Japan could default or devalue its currency within 3-4 years and that the United States could do the same in 10-12 years. He cites that sovereign balance sheets expand 86% from pre-crisis levels once governments start acquiring formerly private sector assets in attempts to thwart the crisis.

Embedded below is Kyle Bass' interview with CNBC, so email and RSS readers will need to come to the site in order to see the video:




Interesting thoughts from Bass as always, as his Hayman Capital hedge fund seems to be one of the few you hear about in the 'mainstream' warning about the potential for large sovereign defaults. We previously got a glimpse as to what Bass was investing in back in October, as 50% of his assets were invested in mortgages then. We haven't seen any updates out of his hedge fund since then, so if you are 'in the know,' please get in contact with us.

For those unfamiliar with Bass, here's what you need to know: Kyle Bass attended Texas Christian University (TCU) in Fort Worth, TX and now runs his firm Hayman Advisors. He launched his hedge fund in 2006 with $33 million in initial capital. In August of 2006, he began shorting around $4 billion of subprime securities through various derivatives. He eventually turned $100 million into over $700 million based on his prediction of the crisis. He previously has worked at Bear Stearns' event-driven and special situations unit and he has also in the past headed an office of Legg Mason. His first major prediction was centered around leverage. We'll have to see if his second leverage-based prediction plays out.

Kyle Bass' Hedge Fund Hayman Capital: 50% Of Assets Invested In Mortgages (Investor Letter)

Hat tip to the PragCap for posting this gem up. Kyle Bass, Managing Partner at Dallas based hedge fund Hayman Advisors LP has sent out his latest investor letter and as always, it is another long (23 pages) and detailed piece that provides macro insight. This is Bass' first letter since almost 6 months ago when he wrote his March letter equally full of juicy thought. When last we checked in on Hayman's performance, they were up over 340% since inception. Regretfully, we don't have anymore up-to-date information but we'll certainly pass it along if we receive it. Bass & Hayman are also well known for predicting the subprime crisis along with fellow hedge fund Paulson & Co. As we've followed Bass, we've noted his decisively bearish stance on the economy as a whole as he has even gone as far to predict sovereign defaults, something he again touches on in this letter below.

This time around, Bass summarizes his stance by cementing the following viewpoints. He thinks inflation will take its toll, or as he calls it, "currency debasement." He notes that inflation typically takes 1.5 years to come to roost but he feels it will arrive quicker than normal due to the severity of the stimulus that has been necessary to prop up the economies of the world. Obviously, he is also not bullish on the macro environment in general. In fact, he is downright bearish, particularly on the US consumer. And, as the US consumer goes, often goes the US economy.

Based on his stance, he has positioned Hayman's portfolio as follows. He has invested in credit but takes a cautious stance, investing in mortgage backed securities that are very high in the capital structure. About 50% of their assets under management are now in mortgage positions, which shows you his conviction here. He likes mortgages that have short average lives and have nice risk adjusted yields. He writes, "Our underwriting standards take into consideration a range of macro variables including further home price depreciation, maintained stress on consumer balance sheets and a prolonged downturn in the labor market." Hayman, named after the island where Bass honeymooned, also now has corporate credit positions in the form of bank loans and high-yield bonds to the tune of 25% of assets now. Interestingly enough, we also see that Hayman has allocated part of their portfolio to precious metals and they are also evaluating other natural resource plays. Lastly, Bass also believes that rates will start to head higher over the next 1.5-2 years and that Japan has the "best convexity for rates."

Embedded below is the October letter from Kyle Bass & hedge fund Hayman Advisors (or download the .pdf here):




Kyle Bass attended Texas Christian University (TCU) in Fort Worth, TX and now runs his firm Hayman Advisors. He launched his hedge fund in 2006 with $33 million in initial capital. In August of 2006, he began shorting around $4 billion of subprime securities through various derivatives. He eventually turned $100 million into over $700 million based on his prediction of the crisis. He previously has worked at Bear Stearns' event-driven and special situations unit and he has also in the past headed an office of Legg Mason. His first major prediction was centered around leverage. We'll have to see if his second leverage-based prediction plays out.

If you still aren't negative on the economy and/or markets yet after reading the above letter, then sampling a bit of Hayman's March letter might very well make you reconsider your opinion, at the very least. It's definitely thought provoking stuff and is highly recommended as well.

Hayman Capital's Kyle Bass Predicts Sovereign Defaults

Hedge fund Hayman Advisors has a morbid outlook on the economy. Kyle Bass, the manager of Hayman, is betting on a massive wave of state bankruptcies and restructurings, particularly in Europe. At first glance this may seem far-fetched. But, you have to consider Bass and Hayman's track record thus far. Their fund was up 340% since inception according to their investor letter in March of this year. They were also up 6% in 2008, a year that saw the S&P drop by massive double figures. Bass collected nearly half a billion dollars from his bets against subprime. Much like John Paulson of hedge fund Paulson & Co, Bass also predicted the crisis. His next prediction is even more extreme.

Bass has gone as far to say that he thinks there will be massive sovereign defaults. We initially cited his dreary outlook in our piece, 'Ranting, Raving, & Contrarian Signals' back on March 8th, 2009. And, we did so because such extreme pessimism is usually a sign of short-term tops or bottoms. And, right on cue, the market is up over 30% since we highlighted that short-term contrarian signal. Contrarianism aside, Bass does command respect. After all, he profited handsomely by predicting the crisis and the collapse of subprime. While such extreme pessimism may be a catalyst for a short-term rally, we should be quite concerned if Bass' next set of predictions come true, as they would undoubtedly affect the long-term.

Bass has specifically turned his focus to Europe, where he sees a large cloud of denial and leverage. While he sees problems throughout the world, he claims that Europe is in the eye of the storm. A quick example of this is the fact that American banks have written down around 50% of their losses. European banks, on the other hand, have only written down around 17%. Bass says that,

"The crux of the problem is not sub-prime, or Alt-A mortgage loans, or this or that bank. Governments around the world allowed their banking systems to grow unchecked, in some cases growing into an untenable liability for the host country ... We have spent a good part of six months combing through the world's sovereign balance sheets to understand how much leverage we are dealing with. The results are shocking ... There could be a cluster of defaults over the next three years, possibly sooner."

Bass' hedge fund thinks that the hazard of default stems from a combination of both out-of-control public debt and liabilities from specific banks (like Fortis, RBS, etc) that now prominently appear on sovereign balance sheets. He seems to flirt dangerously with the phrase, 'economic depression.' He is also careful to point out that he is not Dr. Doom. He has simply studied the housing market and sovereign balance sheets to the point where he is telling it like he sees it.

Countries have largely fought off the crisis by printing money and rolling over their debt. And, here in the United States, quantitative easing has already begun. As Ambrose Evans-Pritchard points out in his Telegraph piece, "spasms of default" occur every few generations according to research by former IMF chief economist Ken Rogoff. Such data highlights that in both the 1830's and the 1930's, half of the world was essentially torpedoed. Are we in for another generational fragmentation? Kyle Bass is clearly not ruling out that possibility.

Background on Kyle Bass & Hayman Advisors: Kyle attended Texas Christian University (TCU) in Fort Worth, TX and now plies his trade at his Dallas based Hayman Advisors. He launched his hedge fund in 2006 with $33 million in initial capital. In August of 2006, he began shorting around $4 billion of subprime securities through various derivatives. Then, he eventually turned over $100 million into over $700 million based on his prediction of the crisis. He previously has worked at Bear Stearns' event-driven and special situations unit as has also headed an office of Legg Mason. His first major prediction (and victory) focused on over-leverage. We'll have to see if his second leverage-based prediction plays out.

If you haven't quite had your daily dose of pessimism yet, then check out Hayman's March letter. It will probably fill you right up.