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Kyle Bass Warns "The 'AIG' Of The World Is Back"

Tyler Durden's picture


Kyle Bass, addressing Chicago Booth's Initiative on Global Markets last week, clarified his thesis on Japan in great detail, but it was the Q&A that has roused great concern. "The AIG of the world is back - I have 27 year old kids selling me one-year jump risk on Japan for less than 1bp - $5bn at a time... and it is happening in size." As he explains, the regulatory capital hit for the bank is zero (hence as great a return on capital as one can imagine) and "if the bell tolls at the end of the year, the 27-year-old kid gets a bonus... and if he blows the bank to smithereens, ugh, he got a paycheck all year." Critically, the bank that he bought the 'cheap options' from recently called to ask if he would close the position - "that happened to me before," he warns, "in 2007 right before mortgages cracked." His single best investment idea for the next ten years is, "Sell JPY, Buy Gold, and go to sleep," as he warns of the current situation in markets, "we are right back there! The brevity of financial memory is about two years."


Click the image below for the full presentation (unembeddable):

The main thrust of the discussion is Bass' thesis on Japan's pending collapse - which we wrote in detail on here, here, and here - and while the details of this thesis should prepare most for the worst, it is the Q&A that provides some very clear insights into just what is going on in the world.

Starting at around 50:00...

Bass On Immigration Reform in Japan - hailed as a solution to the demographic problem - Bass says "Ain't gonna happen. They need wage inflation and this will not encourage that. It's an untenable situation." Summing up his whole view on Japan - "I just don't think it can be fixed."

Question: When you look today in the capital markets at the tactical asymmetry that exists among the various financial instruments to take advantage of cheap optionality - what is that instrument?

I'll give you guys a bit of an idea... we don't talk about exactly what
we do - we tell you how much we love coke but we're not gonna give you
the formula.


The AIG of the world is back - I have 27 year old kids selling me one-year jump risk on Japan for less than 1bp - $5bn at a time.


You know why? Because it's outside of a 95% VaR, its less than one-year to maturity, so guess what the regulatory capital hit is for the bank... I'll give you a clue - it rhymes with HERO...


If the bell tolls at the end of the year, the 27-year-old kid gets a bonus... and if he blows the bank to smithereens, ugh, he got a paycheck all year.


We are right back there! The brevity of financial memory is about two years.


I wouldn't sell nuclear holocaust risk in Dallas for 1bp - you should be fired for thinking about selling something for less than 50bps.. and yet - this is happening again...


And it's happening in huge size - huge - we bought half a trillion dollars worth of these 'options'... and interestingly enough, one of the biggest banks in the world called me the other day and asked me if I would close my position - that was an interesting day for us - that happened to me in 2007 right before the mortgages cracked.


They said "we ran some new risk tests," and I said "really?"

"Yeah, the new stress scenario is a little more punitive than the last one."
"What is it?"
"Well, we don't wanna share our proprietary secrets"
"Ok, then I am not closing it",
and they said "woe woe woe.. in our old model rates stressed 50bps, in the new one they stress 400bps"
"Yeah, that would really hurt wouldn't it".
"Yeah, we'd like to close that one"
"I'd like to but I am not going to do that for you"...

The point is - Why would they run a stress test like that? They are starting to realize! Who would have them run that stress test. It's happening again.

Question: Do you buy guns, gold, neither, or both?

I don't get paid to be an optimist, I don't get paid to be pessimist, I get paid to be a realist - and a prudent fiduciary of the capital, and then if i have time I care about the social issues of the world.


If I am right, the social issues are going to be very difficult. I don't think we devolve into anarchy and I do think the payment systems will continue to work but what they will pay with will be wumpum...


We will go thru a period where its a little tougher...


We went through a period where it was briefly tough and now there are 1400 new billionaires in the world - maybe some capital was misallocated...

Question: Which one investment would make for the next ten years

I would buy Gold in JPY and go to sleep... Sell JPY, Buy Gold, Go to sleep, and wake up ten years later and you'll be fine. Don't put all yourr money in it but that is the single best investment you can make today.

(h/t @EquityAnalystNY)

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Tue, 03/12/2013 - 22:42 | 3324765 ItsEvolutionBaby
ItsEvolutionBaby's picture

i do love me some kyle bass

i'll listen to this while i play dota 

Tue, 03/12/2013 - 22:49 | 3324777 Dr Paul Krugman
Dr Paul Krugman's picture

Investors are always right, economists are always wrong - Zero Hedge plays on.

Tue, 03/12/2013 - 22:54 | 3324794 palmereldritch
palmereldritch's picture

And TrillionDollarBoner_ strikes again

Tue, 03/12/2013 - 23:52 | 3324938 SafelyGraze
SafelyGraze's picture

I had to install microsoft silverspy on my machine in order to watch the video



Tue, 03/12/2013 - 23:58 | 3324951 nope-1004
nope-1004's picture

lmao!!!  Big government-backed insolvent bank phones Hayman, "uh, would ya mind not betting against us like that?  Please?  Pretty please?"

Bankers...... dumber than a sack of shit.


Wed, 03/13/2013 - 00:47 | 3325027 Dr Paul Krugman
Dr Paul Krugman's picture

Funny how Tyler did not mentin Austin put the forum together.

Ignore the economists!


Wed, 03/13/2013 - 00:49 | 3325031 TruthInSunshine
TruthInSunshine's picture


Congrats on your brand new newspaper, Dr. Krugman!

Wed, 03/13/2013 - 00:53 | 3325040 Dr Paul Krugman
Dr Paul Krugman's picture

I am way ahead of you.

All Me, All The Time:


Wed, 03/13/2013 - 00:56 | 3325046 Dr Paul Krugman
Dr Paul Krugman's picture

Edit:  Austan.

I guess the scotch has gotten the best of me tonight.

Wed, 03/13/2013 - 01:20 | 3325093 Half_A_Billion_...
Half_A_Billion_Hollow_Points's picture

"If I am right, the social issues are going to be very difficult.
 I don't think we devolve into anarchy and I do think the payment systems will continue to work but what they will pay with will be wumpum..."



Isn't it nice to know there's a payment system that will keep on going and gaining value after the TBTF start crashing?  


Isn't is nice to know that I'll be able to get supplies from afar?  



Bitcoin holders safe.


Wed, 03/13/2013 - 08:57 | 3325470 LawsofPhysics
LawsofPhysics's picture

When fraud is the status quo, possession is the law.  Get physical, sleep well.  Wake us when those bitcoin buy diesel for my tractors.  Morons will be morons and sheep will be sheep.  Let the fleecing continue.

Wed, 03/13/2013 - 19:14 | 3327884 Popo
Popo's picture

Microsoft Silverlight? FAIL.

I'd love to watch me some Kyle Bass, but I prefer a browser that doesn't run dog slow.

Wed, 03/13/2013 - 19:36 | 3327941 zaphod
zaphod's picture

So how do I short JPY as a retail player? 

Any suggestions?

Fri, 03/15/2013 - 08:26 | 3331958 DblAjent
DblAjent's picture

FX or ETFs

Wed, 03/13/2013 - 01:35 | 3325112 Boris Alatovkrap
Boris Alatovkrap's picture

When vodka is get better of Boris, is break a few Krugman... good for economy.

Wed, 03/13/2013 - 01:51 | 3325124 TruthInSunshine
TruthInSunshine's picture

There is saying in Mother Russia:

"Those who live in Duroplast state owned apartment (projects) not to throw empty Stolichnaya bottles at neighbor sleeping in Trabant or Lada."

Wed, 03/13/2013 - 02:10 | 3325153 Manthong
Manthong's picture

Krugman for President.. what a concept.  :D


Wed, 03/13/2013 - 07:53 | 3325325 GetZeeGold
GetZeeGold's picture



Well....he's already got the Nobel Prize.


He's totally qualified.

Wed, 03/13/2013 - 03:51 | 3325192 WelfareFTW
WelfareFTW's picture

HAHAHAHA, OMFG, How the eff do you guys come up with this s**t day after day... you guys fucking rock! hilarious....

Wed, 03/13/2013 - 07:08 | 3325261 French Frog
French Frog's picture

Yes, from the serious to the funny, the wit & repartee of many ZH replies are often as, if not more, enlightening than the original article

Wed, 03/13/2013 - 09:52 | 3325656 DblAjent
DblAjent's picture




I come here for the articles, but more for the comments

Thu, 03/14/2013 - 01:04 | 3328764 Boris Alatovkrap
Boris Alatovkrap's picture

Boris is come to zero hedge because is not like shrubs, but stay for humorous intake.

Wed, 03/13/2013 - 08:41 | 3325429 youngman
youngman's picture

Why not???? It won´t hurt the car...

Wed, 03/13/2013 - 20:51 | 3328163 Alexandre Stavisky
Alexandre Stavisky's picture

Naively many thought 2008 with the bank failures, AIG, GSEs, Primary dealer backstop, full ramp monetization, TARP, and 50% collapse in equities was the systemic shock that, regardless of gov't response, would keep the dominoes rolling to force restructuring, defaults, re-denominations of currencies and step devaluations.  I never thought that the nation would accept the financial abuse and would understand the repercussions of Fed et al showing up every day with 4 billion in thin-air money.

I was wrong.  I naively thought all the stakeholders response to open global monetization would inevitably lead toward the reset.  I was wrong.  It seems it wasn't financial armageddon.  And now, with that sour wisdom, I believe all nations that can print money, may go that next huge leap and issue currency without sterilization of buying newly issued bonds.  If the dissaving by Japanese threatens to spike bond yields and interest payments, those bonds will be further suppressed.  The central banks may be the one and only buyer and may suppress interest rates to absolute (even negative) zero yields.  They could easily make instant devaluations.

The responses show that they intend to never lose control again.  Issuance of currency irrespective of historical mechanisms can go on a long, long time.  We are past A-Ha moments.  We are past classical behaviour.  We are already deep into thin money creation and distribution.  When all the currencies are controlled, and globally large players are coordinated, outcomes will be what they dictate. The can suppress whatever they want, sponsor whatever they want, and all the stakeholders have to take it.

So even with foreign exchange risk, current account deficits, industrial contraction, lopsided demographics, retail liquidations of scale, massive debt rollover, ad infinitum, where is an investor to flee to?  If it is all arranged and coordinated and backstopped, why would anyone still be putting on trades?  Maybe 1 basis point for jump risk isn't cheap, maybe in this "new normal" it is free money for the seller.

Wed, 03/13/2013 - 01:02 | 3325060 Half_A_Billion_...
Half_A_Billion_Hollow_Points's picture

This is hilarious stuff, TiS.


That offer for a beer in btc stands if you want to.

Wed, 03/13/2013 - 01:22 | 3325089 TruthInSunshine
TruthInSunshine's picture

Thanks. If you noticed, I didn't comment on the bitcoin article ZH published today.

As far as I'm concerned, I don't know enough about it to make comments that I'm confident are fair or informed, and I also don't like to see any rift develop between people who agree that one of the most significant root causes of our economic crisis is that fractional reserve banking alchemists are conjuring fiat literally from nothing, that enjoys monopoly status, and they are distributing it for free or nearly for free to their select best friends forever, to the proportional interference with and destruction of economic production that provides real goods & services, adding real value, productivity & utility to peoples' lives.

Until someone can convince me otherwise with concrete facts, those who endorse the use of bitcoin are on the same side as anyone calling out the fractional reserve fiat fraud for what it is and the damage it has done and is doing to the real economy and real people.

Wed, 03/13/2013 - 01:23 | 3325098 Half_A_Billion_...
Half_A_Billion_Hollow_Points's picture

Sure.  Let's see what history has in store.  

KB is talking about breaking a bank here, and a payment system under severe stress.  

Oh well, good luck to you and please keep the comments flowing.  

High-risk high-reward, right?  Let the chips fall where they may.

Wed, 03/13/2013 - 20:17 | 3328076 eatthebanksters
eatthebanksters's picture

I'll bet the banks will pay a lot more than the 1bp Kyle paid to buy those swaps back...

Wed, 03/13/2013 - 09:34 | 3325588 Sweet Chicken
Sweet Chicken's picture

Truth In Sunshine for president! 

   ......and Law of Physics for VP

Wed, 03/13/2013 - 11:13 | 3325942 steve from virginia
steve from virginia's picture




" ... to the proportional interference with and destruction of economic production that provides real goods & services, adding real value, productivity & utility to peoples' lives."



This hardy weed never dies, even as it is demonstrably false. Everything that emerges from 'economic (presumably industrial) production is subsidized by debt and must be. If economic production paid for itself it would have already. There would be no debts as any would be resolved by simply deploying more 'productive' machines.


The economy provides borrowed fortunes for a handful of tycoons and plutocrats, some worthless, time-wasting junk.


Instead of productive 'output' the world's nations and peoples are burdened by hundreds of trillions of dollar-debts, that can never be repaid, against collateral that no longer exists. Almost every 'good' in the US-style waste-based economy costs more than any possible return.


Our industries are subsidized by debt: it cannot be otherwise nor has it ever been otherwise, we simply lie to ourselves about the nature of our activities as if nature herself can be persuaded by public relations campaigns.


Sadly for the believers, the 2d law of thermodynamics has a different view of 'economic production' and is now assigning real costs that cannot be evaded or papered over with wishful thinking or false beliefs.



Wed, 03/13/2013 - 18:52 | 3327823 Doomer
Doomer's picture

So, who wants to lend me a couple billion JPY so I can buy some gold?

What rate can I get for 10 years?

Have your people call my people.

Abe, are you listening?

Wed, 03/13/2013 - 19:27 | 3327914 auric1234
auric1234's picture
I loved the: 4 Killed in Paul Krugman Monetary Policy By PAUL KRUGMAN

A market correction who went on a multiple equilibria in two communities in utility function remained on the market efficiency.


Wed, 03/13/2013 - 20:37 | 3328130 Bendromeda Strain
Bendromeda Strain's picture


Gov. Andrew M. Cuomo, accompanied by the State Police superintendent, Joseph D’Amico, rushed to the village, where he was photographed near where the gunman was believed to be holed up. A news conference was repeatedly delayed as the gunman remained at large.

That effin' whore can't wait to dance on some bodies to make political points. If it was NYPD his ass might have got "inadvertantly" shot.

One can dream anyways.

Wed, 03/13/2013 - 01:12 | 3325081 AbbeBrel
AbbeBrel's picture

I can only wonder how Hugh Hendry is positioned - My guess is that he has also loaded up on insanely cheap "risk premium".

"That success was simply a matter of contentious macro posturing. In other words, going long very rich risk premium or buying cheap stuff. "


Wed, 03/13/2013 - 20:21 | 3328084 eatthebanksters
eatthebanksters's picture

Some guys know how to sniff out deals...Bass is one, Hendry is another (and there are plenty more)...one thing they have in common is that they tend to piss off the entrenched establishment with their brutal honesty....imagine that!

Wed, 03/13/2013 - 06:09 | 3325247 Mactheknife
Mactheknife's picture

Sure would be nice to know which bank that is...



Wed, 03/13/2013 - 07:50 | 3325319 Lost My Shorts
Lost My Shorts's picture

I hope they are too big to fail.

If risk jumps, who does Bass think will pay off his half-trillion?  The bank which is already insolvent on a MTM basis even before the event?  Or does he expect the taxpayer to cover it?  What's Texan for bleep you?

Either Bass paid for nothing on those 1-bp derivatives, just to have a funny talking point, or he is one evil bastard.  When Wall Street turns into a casino, both the player and the house are evil.

Wed, 03/13/2013 - 08:53 | 3325458 csmith
csmith's picture

"...he is one evil bastard."

Why blame Kyle? No easier money to be made than that which comes from bureacrats/taxpayers/central banks. Why look anywhere else? They NEVER learn.

Wed, 03/13/2013 - 10:00 | 3325673 Lost My Shorts
Lost My Shorts's picture

AIG required a taxpayer bailout to save the under-priced bets purchased by Goldman Sachs.

Now Kyle Bass brags that he is playing the GS role, purchasing underpriced bets from a bank that will need a taxpayer bailout if the bets pay off.

How popular is GS around here?  How is Kyle bass any better?

Just askin'

Wed, 03/13/2013 - 20:25 | 3328097 eatthebanksters
eatthebanksters's picture

Soros is an evil bastard...Bass is an opportunist.  Bass will never wait to try and collect a half trillion....by the time that event happens it ill be too late to collect.  He just bought a diamond for pennies in the bargain basement of Woolworths...now he's gonna stand out in front of Tiffany's and sell it for half its real value and still make a fucking killing.  I love the way this guy thinks!

Wed, 03/13/2013 - 10:38 | 3325823 JailBank
JailBank's picture

Because KB didn't create synthetic CDOs and sell/reccomend them to customers meanwhile betting against the very products he created to make money. Bass saw a product offered by the bank that the bank decided had nearly 0 risk and he bought it.


I recall in all the testimony from the TBTF banks after the collapse of Lehman that is was buyer beware and the banks plus ratings agencies were not at fault, the Germans should have known what they were buying. Don't compare a person that found a nitch in the market and exploited a bank selling this crap for GS or JPM.

Wed, 03/13/2013 - 10:53 | 3325891 Lost My Shorts
Lost My Shorts's picture

I will compare them exactly.

Both exploited poor risk management and the greed of individual staff at TBTF institutions.  Both placed huge bets that the counterparty couldn't / can't pay.  Both knew / know the counterparty couldn't / can't pay.  Goldman later collected from US taxpayers.  Bass would do the same.

Looks identical to me in every respect that matters.

Wed, 03/13/2013 - 11:19 | 3325970 steve from virginia
steve from virginia's picture




IF his short-term ... < 1 year ... bet pays then the bank is gone and Bass is paid in funny money. Joke's on him.


Counterparty failure ... difficult to hedge must less profit from.

Wed, 03/13/2013 - 20:44 | 3328147 Bendromeda Strain
Bendromeda Strain's picture

Ya right, you and the genius above you have it all figured out. Let me know when Austan Goolsbee calls you... besides to have his car brought around that is. If the joke is on him, guess what is all over you.

Wed, 03/13/2013 - 09:33 | 3325582 kaiserhoff
kaiserhoff's picture

If he recovers a few pennies on the dollar, he's still way ahead.

Hell, it might be fun to own a big bank.

Wed, 03/13/2013 - 11:02 | 3325918 irishlink
irishlink's picture

Considering the junk on the Books of all the banks and that includes central banks and especially British banks it will not matter which bank as anyone of them is qualified to be the first domino.

Wed, 03/13/2013 - 00:01 | 3324960 palmereldritch
Wed, 03/13/2013 - 00:37 | 3324991 TruthInSunshine
TruthInSunshine's picture



Now THAT is some funny shit.

Someone spent a lot of time on that, and it's some of the best comedy I've encountered in a LONG time, since great comedy contains a lot of truth.

Wed, 03/13/2013 - 01:40 | 3325122 IridiumRebel
IridiumRebel's picture

I think I sharted.

Wed, 03/13/2013 - 01:45 | 3325127 akak
akak's picture

Not as much as Krudman.

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