J Kyle Bass: 'the man who sold the world'

published 13 January 2012

"For a state more associated with cowboys and cattle, Texas is home to a surprisingly big herd of hedge funds," says The Economist. It's a thriving industry, which traces its vibrancy to the state's "wildcatter" risk-taking tradition. Among its most celebrated figures is J Kyle Bass, the Bible school graduate famed for betting early against the US housing bubble and winning big. He could make a further killing if Europe falters.

When I met Bass, "I had an experience I've often had while listening to people who seem perfectly certain about uncertain events", writes Michael Lewis in Boomerang, a book on the economic crisis. "One part of me was swept away by his argument The other part suspected he might be nuts."

His every note is a must-read on Wall Street. So what are his views? Asked what he'd advise his mother to invest in, he replies, "Guns and gold," extracting a bar from his desk drawer. He's so convinced the US government will debase the currency that he spent $1m buying 20 million nickel coins. When home on the ranch (thousands of acres with enough weapons and explosives for a battalion), he likes tearing around in a jeep, firing sniper rifles at beavers.

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What can account for Bass's following? It's his reputation for putting in the spadework, says Bloomberg. He backs his hunches with formidable research. A former competitive diver, who put himself through Texas Christian University, Bass started out with Bear Stearns and Legg Mason.

He formed Hayman Capital Partners in 2006 on his conviction that something was wrong with the US mortgage market, grilling Wall Street trading desks and reading every analysis of collateralised debt obligations (CDOs) he could find. "What I didn't understand was the synthetic market place... It took me a month to understand what the hell was going on." He hired private detectives to investigate potential shorting targets.

As the bank bail-outs took hold, Bass decided subprime was the symptom of a bigger crisis: the banks' debts had simply been added to historically high and unsustainable government debts. "The first thing we tried to figure out," he told Lewis, "was how big these banking systems were, in relation to government revenues" no one had this data.

He took the research to Professor Kenneth Rogoff, America's expert on sovereign defaults. When Rogoff said he could hardly believe the situation was this bad, Bass thought, "Who is paying attention? If you don't know this, who does?"

Having already earned him the soubriquet "the man who sold the world", Bass's giant bets against the eurozone are still in train. Yet he insists he's not a natural doom-monger. "I'm not someone hell-bent on being negative I think this is something we need to go through. It's atonement for the sins of the past."

How Greece could make Bass a fortune

In the conference room of Hayman Capital Partners' offices in Dallas hangs a painting of a zero dollar bill, featuring Lenin's face and the legend "United Socialist States of America", notes The Economist. Bass isn't afraid to flaunt his political views (his car sticker reads "God bless our troops, especially our snipers"), but the painting highlights his investment philosophy too. By propping up the banks, he argues, Big Government has merely succeeded in prolonging the crisis. "If we really had a capitalist model, we'd have bankruptcy."

One of Bass's favourite dictums, says Tony Barber in the FT, is that "capitalism without bankruptcy is like Christianity without hell". With several European peripheral countries and their banks now effectively insolvent, he believes that only a massive write-down of debt can stem the gangrene. "We have been conditioned to believe there is always this saviour out there," he told the AmeriCatalyst conference, a think tank, in November. "There's an optical backstop designed to make everyone believe countries can't default Those optics are starting to come into question." 2012 will be doomsday year.

Bass stands to make a fortune if there is a Greek default, says The Sunday Times. He started shorting Greek bonds by buying credit default swaps when prices were absurdly cheap. Having secured insurance at an annual premium of just $1,100 dollars per $1m of Greek government bonds, he would see a return of $700,000 for every $1,100 bet if Greece writes off its debt by 70%.

Bass believes that's unlikely to be the end of it, says SeekingAlpha.com. In December, he warned that "the pending 2012 eurozone break-up will only accelerate problems in Japan and ultimately the US". His advice to investors is to be "much more conservative than you think you need to be", notes BusinessInsider.com. "The return of capital is much more important in the next few years than the return on capital."