10 Things We Learned From Speaking With J. Kyle Bass

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Kyle Bass. the founder of Hayman Capital, made a fortune betting against subprime mortgages, with moves that resembled John Paulson’s famous bets.

Yesterday morning, we had the privilege of speaking with J. Kyle Bass for an hour in New York.

During our chat, we talked about the housing bubble, the financial crisis, and what’s coming next.

We’ve plucked out 10 interesting lessons he taught  us.

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1. Private Equity Made It Impossible To Bet Against The Homebuilders

'Private equity deals were happening every day. And if you went and bet against homebuilders, there could be a private equity firm that could lever themselves 10-to-1 and buy a homebuilder. So there's not a lot of asymmetry being short homebuilders.'

2. To Bet Against Housing, He Hired Private Investigators

3. Securitization Caused The Housing/Credit Crisis, Not Derivatives.

Bass cannot stress enough that derivatives played no part in causing the financial crisis.

What one needs to understand is that derivatives are a perfectly reasonable tool for speculating and hedging, which in turn is a zero-sum game. Think about if all these crappy mortgages had never been put into CDO or MBS form (securitization). All these contracts between Goldman and AIG and the like would have never been drawn up. The fact that companies went out and pooled together pure crap doesn't change the fact that the underlying asset is still crap.

4. 2006 Was When It All Started If You Look At The Inventory.

5. Bass Couldn't Wait To Start A Fund. Literally.

6. 1998 Was A Test Run For The Financial Crisis.

Bass reminds us that back in 1998, we had a test run of things to come. Bass kidded with us about our age but then painted a picture of a grim event that didn't involve either Merriwether or Long-Term Capital Management.

'I don't know if you guys remember, but back in 1998, there was a sub-crisis in 1998. 1998 was a time in which there were companies that were high loan-to-value second lien lenders. So companies like First Plus Financial, Ames, Emery, Cityscape Financial - these were all high LTV mortgage lenders. You remember gain-on-sale accounting was a big deal. Right? Back before they banned it. '

'OK, so what these guys would do was they would make these high LTV loans like 125% at loan-to-value loans and they would be second liens. So think about your priority in that position: you're never gonna collect if anything ever goes wrong. So they were hiring PhDs and trying to figure out what the incidents of default on these second-liens were gonna be. And the bottom line was, again, they were convicted felons making these mortgage loans. And at the time, there were many Wall Street firms that just didn't care, packaging these things up and securitizing them. This is back in '98, so '96, '97, '98 second liens. So that market blew up in 1998. '

'All those companies I just mentioned to you went bankrupt except for Greentree Financial - Conseco bought it. It almost brought down Conseco but Conseco spun it out in bankruptcy to a private equity firm.'

In Hank Paulson's latest book, 'On The Brink,' Paulson is essentially neutral and doesn't lash out at anyone in particular, treating everyone with respect and courtesy.

In reality, Bass says, he hated plenty of people in the book. How's he know? Bass is friends with some of them but he wouldn't say who (and with good reason!)

8. It's Not Easy Financing Your House In Japanese Yen

9. Bass Is Superstitious - And That's A Good Thing

'I never count my chickens before they hatch. Alright? In this business and doing this, basically investing in global capital markets, you have to be opinionated. But I don't believe you can bring an ego into it. The moment you bring an ego or arrogance into finance, you'll lose. You'll be crushed under your own weight. You have to be able to admit readily that you're wrong and learn from it and move on.'

10. Greece WILL Default

In the past 200 years, Greece has defaulted on its debt 108 times. Why any country or person would continue to lend them money is absurd unto itself.

Bass predicts that Greece will default on its debt within the next two years, saying he'll be 'surprised if they even make it through this year.'

Bass: 'Greece WILL default.'

Veneziani: 'Yeah?'

Bass: 'Yeah! In the next two years. I'll be amazed if they make it through this year. I'll be amazed.'

Mr. Bass then notes that Greece will try to borrow all it can before defaulting. Hey, if you're gonna default on your debt, might as well make the most of it, right?

That's all (for now), but be sure to check out:

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