Kyle Bass On Rehypothecation And Other Keynesian Endgame Scenarios

Tyler Durden's picture

If readers have the sense there has been a deluge of Kyle Bass reading (and viewing) materials on Zero Hedge in the past two weeks, it is because there has been: and why not - after all, unlike all other cheap talking heads, and know-nothing pundits who merely need a suit to make an appearance on one of the TV's financial comedy channels, Kyle has been consistent in the most important thing - telling the truth. Today, he took his resurgent popularity to CNBC which always knows which way the winds blow, and told David Faber more or less everything that Zero Hedge readers know already about Europe's collapse, on why the ECB will print but only after a default, and about the inevitable global debt restructuring. There was a twist: as most regulars here know, the key topic of the past week, of December, and potentially of 2011, is the limitless "fractional Prime Broker lending" of assets-cum-liabilities (and when it comes to the realization that one's gold itself may be rehypothecated, via GLD, it is no surprise why paper gold is plunging, with the expected delayed effect of slow comprehension) in an infinite loop of daisy chained counterparty exposure, also known as rehypothecation. Which is precisely what what Bass touches on 9 minutes 30 seconds into the interview when the discussion shifts to "shortening collateral chains." Must watch for everyone who enjoys not being lied to.

The most recent Kyle Bass investor letter can be found here, and a far more extended interview is here.

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hedgeless_horseman's picture



...shortening collateral chains...

Indeed, the whole world is short collateral. 

Same as fractional reserve banking in the old west, when the chest of gold only visible behind bars in the bank's vault was usually mostly filled with sand.

Pladizow's picture

WTF Tyler - Where's his Dec client letter?

Dont give me the lame excuse that it hasnt been released yet.

If Faber can read from it, ZH should have it!

nope-1004's picture

PM paper prices are going to fall hard, as the MF Ponzi has killed the futures market.  There will be a separation between paper and physical prices, and people like Bass know it.  This is the deflation scare, as far as I'm concerned.  Q1 of 2012 is going to be a heck of a ride.


hedgeless_horseman's picture



Same as fractional reserve banking in the old west, when the chest of gold only visible behind bars in the bank's vault was usually mostly filled with sand....

...The banks would move the only full chest of gold from bank to bank, just ahead of the bank inspectors.  Sometimes they didn't make it in time.  True.

All this reminds me again of another Keynesian Endgame Scenario: The "Repo 105" Scam: How Lehman Fooled Everyone (Including Allegedly Dick Fuld) And How Other Banks Are Likely Doing This Right Now


Fukushima Sam's picture

The EU is like an athlete who wants to compete in the Olympics on a diet of only his own poop.

GeneMarchbanks's picture

That's not fair. We also have urine.

Comay Mierda's picture


I'd like to see a chart of their ratings.  everyone i know has stopped taking this channel seriously a long time ago.

FEDbuster's picture

Faber and Santelli are good, the rest are a joke.  I would watch a Kyle Bass interview with Joy Behar, he is that good.  As far as a disconnect of paper and physical gold, I would like to see at least a $100. premium over near month futures for physical to prove it.

redpill's picture

It's always interesting to see the CNBC commentators expose their skewed world view, basically every question they ask can be distilled to the following:  Why can't the ponzi continue?

And Bass always does a great job of patiently explaining why the unsustainable is unsustainable.


You can't hedge against something losing value when no one wants it at all.


Of course, instead of further discussing this vital concept that is going to shape the markets of the world for the next several years, they are suddenly "short on time" so they can go to commercial or have one of their inane market updates that pretends to understand why stocks have moved in some direction over the last 5 minutes, or have an absurd panel of clueless idiots describe their "hot stock picks."  Of course this was still a relatively long segment by CNBS standards, but it just goes to show that to these hosts, one guest is as good as another and all their points of view are equal.  All that matters is getting to commercial.


twotraps's picture

loved the clip, great point about being short on time, pathetic.   CNBC is somewhere between Financial ESPN and the TV version of USA Today....lots of pictures, big print, advertising and nothing else.   Actually, USA  Today has a horoscope.

DollarMenu's picture

Yes, the CNBS shills are really clueless.

I'm a bit worried about Mr. Bass.

Is it just me, or did the closing few seconds reveal a few shades of

disgust and resignation in his face?

I wonder if there will be a 'next interview'.

I am so grateful for the knowledge that he so freely shares, I hope he continues to offer it.

I can not afford to subscribe to his letter, and he is such a joy to listen to.

Thanks TD for all you do to spread awareness.

twotraps's picture

Excellent point, he may curtail visits as he seems to realize he's just part of the circus.  I also enjoy his talks and have learned a lot, funny they give to Faber and that alone was supposed to carry some extra weight or something, He was likely still shaking his head for several minutes afterward, and then remined of the head shaking by friends, hard to hide when he remained patient with Simon darling....  What?  I'm English and I know the Europeans?  Please, just say thanks when a very successful, eloquent person was giving you a private lesson the rest of us pay for.

Town Crier's picture

WHOOSH Don't forget CNBC'S cool sound effects WHOOSH

chyros's picture

I was particularly irritated at Bass's constantly talking over the whooshies. They're so cool. Shouting down the whooshies really aggravates the under 5yo viewers.

Pegasus Muse's picture

The banks would move the only full chest of gold from bank to bank, just ahead of the bank inspectors. Sometimes they didn't make it in time. True.

Money Lenders have been wheel'n and steal'n, thiev'n and deceiv'n, long before Jesus threw them from the temple. 

pirea's picture

Actually at KITCO is more than 100.

RickyBobby's picture

Faber looked visibly mad, like Kyle was singlehandedly driving down the market, when he asked about why the Europe can't fix the solvency crisis with more liquidity (debt).

In 2007, CNBC would actually tell interviewees that they only want to talk "positives". Don't know anyone that has gone on recently.

slewie the pi-rat's picture

@ ...shortening collateral chains...

i first saw "shorting..."


Whoa Dammit's picture

"...The banks would move the only full chest of gold from bank to bank, just ahead of the bank inspectors.  Sometimes they didn't make it in time. "

It's happened more recently than back in the Wild West days. Cecil and Jake Butcher did it in the 80's.

"The Butchers operated 27 banks in Tennessee and Kentucky. The banks collapsed in 1983 under the weight of unsecured loans, paper corporations loaded with debt and a massive shell game in which loans were shuffled from one bank to another ahead of the bank examiners. It was the fourth-largest banking failure at the time."

Chief KnocAHoma's picture

This is correct:

1 - MF destroyed the paper gold market

2 - The smart money got out of CME exposure driving the paper market down even further.

3 - If anyone has the balls to place a large bet now for delivery, the physical will not be available at spot. BIG LOSS for the one having to deliver and even more confidence shaken out of the system.

4 - The MF clusterfuck may have scared a lot of players away, but someone is going to take the chance and ultimately stand for delivery.

When that happens, you banking guys are so fucking screwed. There could be multiple MF Globals!

unununium's picture

> someone is going to take the chance and ultimately stand for delivery

Are you saying it's less risky NOT to stand for delivery?  That's ostrich thinking there.

realitybiter's picture

if that is true the miners should start ignoring paper prices as the miners should start looking at real prices in the future...

FEDbuster's picture

Still wonder what the "price" discovery method would be in an economic collapse.  Will your one oz. gold eagle buy the whole cow or just a 5 lb. roast.  In Cormac McCarthy's book "The Road" (granted the worst case SHTF scenario) gold has no value to the survivors.  Food, weapons, clothing, etc... become the valuable items.  I am still reading "When Money Dies" which provides insight into post WW1 Europe.  They were trading gold watches for sacks of potatoes, grand pianos for sacks of flour, etc...  So who knows what anything will be worth?  I know, my family needs water, food and shelter to survive, so I will keep concentrating on my ability to provide those items in our uncertain future.

BalanceOrBust's picture

I agree that paper prices no longer reflect the prices for the physical, but they are still linked right now, correct?


When the system fails and people demand physical, the paper price will have to follow upwards.  That is my understanding.  The issue is that if the upwards correction is too quick, it could force bankruptcies or failures to deliver.  In these cases, some of those holding paper gold will not realize gains because they will be owed by unreliable or no longer existing counterparties.


I guess my point is I would like to get some clarification on whether paper and physical prices really separate or whether it is more an issue that some paper contracts take zero value because of counterparty failure.

nope-1004's picture

I'm no expert, so don't pretend to know how it will all finally settle.  But my feeling is that the ponzi unwind at the Comex is currently underway.  And like all ponzi's, their final blow is when the number of suckers exiting exceeds the number of new fools brought in.  So for the Comex to fail, paper price needs to fall hard - a mass exodus over a short period of time.

Once the jig is up, we're talking literally about hours from a functioning paper market transforming into nothingness.  And when there is only paper documentation as a claim (just as in the MF Global case where clients are looking for their initial deposits), owning the physical commodity is the only way to ensure wealth preservation.


European American's picture

Integrity, the quality of being honest and having strong moral principles, is disappearing from ALL systems in America and around the world.

THIS is THE proverbial "collapse" that is manifesting on the planet.

When the absence of integrity becomes the norm, as seen by the massive numbers of people in America lying and deceiving to get ahead, then who can we trust?

How can one predict (forecast) the intent, motive and outcome of a system that has lost its integrity?

Stay grounded and established in the Self; it's all you can depend on, and, lay low while the storm passes over.

MachoMan's picture

Integrity is simply the degree of adherence to one's moral code.  In this sense, the only way to act without integrity is to be inconsistent with your own ideals.

Further, every person acts to maximize their self interest, which means not only pecuniary gain, but also "moral" appreciation.

If you want to know who to trust, then you can trust that everyone will act to maximize their own self interest.  Once you figure out their moral code and their integrity (adherence to it), then you can make an educated guess as to their prospective actions.  However, in the vast majority of situations, the only thing you need concern yourself with is what action would maximize their pecuniary interest (especially in the context of business decisionmaking).

It seems like your post is based upon a false premise, that there was some universal moral underpinning to society before some unnamed event (2008?  1913?  1776?).  Unfortunately, there is no such thing.  I'll posit that your observations are erroneous because it is your perception of the world that has changed, not the world or the humans inhabiting it...

In the end, to answer your question, you can trust rational actors...  so long as you're reasonably intelligent, you can think a few steps ahead...  just remember that induction is for lazy minds.  What you have to watch out for are rogue waves...  the people who act without contemplation...  and are fueled by some unknown emotion and passion.  The neat thing is, the latter generally get nowhere of consequence...  so depending on where you are in the game, you probably don't have to worry too much about them.  But, every once and a while they slip in... 

prains's picture

Macho, you got the nachos

JimBowie1958's picture

Integrity is not simply relative to a persons moral code. Stalin did not have integrity because he killed, stole and imprisoned anyone and anything he desired and was justified by his own sense of morality.

Integrity is the true currency of any society. Well before silver and gold were convenient comodity to store value, economies could move ahead solely on the basis of a man keeping his word that he gave you. If he defaulted he was considered to be a dishonorable person and his bad reputation would punish him.

This word of mouth is still the dominant marlket making currency, despite what the bean counters may tell you and rightly so. If you cannot a trust a person, no contract will bind him today as the lawyers can turn legal shyte into gold these days. But it is still shyte.

The underlying rot to our whole society is the prevalence of this belief that there is no such thing a honor or moral behavior. When people cannot make a deal on the basis of a handshake, that economy will see its cost of doing business sky-rocket, fraud become common-place and the defrauded derided as fools for trusting a market player.

We past this stage probably twenty years or so ago from what I hear, and all this collosal foolishness that surrounds us is the product of that bankruptcy of integrity. Normally the corrupt would have been replaced by now in a competitive market where the losers are purged, but today they rely on their ability to corrupt to convince those in power to save them from their own folly time and time again; the perpetual moral hazards.

Integrity is a fundamental requirement to any society that does not otherwise depend on savagery and fear.

Rynak's picture

Actually, he is "technically" correct, but leaves out some important infobits, which totally kill his argument.

In theory, integrity simply is "internal consistency".... so, THEORETICALLY, it just requires that one's one beliefs, actions, decisions, everything are consistent.

Problem is: For reasons of how logic works, that is almost NEVER the case for dishonest and self-deceptionary people. Why? Because logic is a bitch, and very often only achievable in a consistent way, if one ALSO is "truthful" (more on that german-specific term further down).

To put it in laymans terms, even though integrity "only" requires internal consistency, internal consistency cannot just be achieved by "believing really hard".... it requires that your concepts ACTUALLY are according to your best available knowledge, do not contradict each other IN SPITE of information from the real world! In other words: For "integrity" to match your behaviour, it is not enough to just lie to yourself and cheat yourself - because that implies an internal contradiction! You must be able to actually honestly explain everything to yourself logically consistently with your own rules, WITHOUT HAVING TO CHEAT.

And THIS typically is not achievable by mere stubbornness, but requires oneself to have a "model of the world", that matches the world, so that the model can without contradiction integrate new information.

As for that earlier mentioned term "truthfullness".... german language not only has a distinction between true/untrue and right/false (as opposed to the US-typical "true/false"-concept which makes little sense)... it has a similiar counterpart to integrity: Where integrity is meant to imply internal consistency, truthfullness is meant to imply external consistency (in other words, not just "inwards" consistency, but also "outwards" consistency (acting consistently to reality)).




MachoMan's picture

Your post is pretty outside the boundaries of what I discussed and is not mutually exclusive with my post...  I agree that integrity is an elusive goal and seldom achieved by humans...  however, it is not insurmountable.  There are many competing "models of the world" sufficient enough to pass reasonable academic muster (possibly limitless)...  which none of their practitioners have any idea whether they are correct.  To a large extent, the stoics got this issue right.

And yes, the objectivists got it right also...  it is truly rare that someone can steal another's lunch and at the same time feel perfectly comfortable when someone else steals his or hers.  Clearly, this would be inconsistent and abounds in political decisionmaking, but I digress.

In short, integrity is useless as an external decisionmaking tool because humans do not generally have much integrity...  much better to be cynical and presume that (pecuniary) self interest motivates us, at the expense of all else.  The neat thing about good stereotypes is that they're right most of the time...  just don't bet the farm on an exception.


Rynak's picture

Well, my post really was meant to only explain the typical basic misunderstandings. Your post instead, goes deeper into the not so obvious issues.

And yes, i agree that a model apparently working without contradiction, does not guarantee that it is "true". Actually, if one only declares some levels of understanding irrelevant (by for example, judgeing only in terms of maths, while ignoring conceptual consistency)... it is possible to create a model of the world, that is the exact INVERSE of the probable truth, yet the model by itself working without any flaws at all (that was the big "achievement" of einstein, lol).

For those who couldn't follow the above, here's the short version:

- Yes, achieving integrity requires at least considering reality, so that one can integrate new information

- Yes, most people and models are not integer

- But also, no, a model merely apparently working without internal contradiction (so, it being integer), does not guarantee truth - especially if that model restricts what kind of tests/checks the model needs to pass (after all, you can always make something seem to work, if you just declare all the contradictions irrelevant :)

MachoMan's picture

You're confusing morality with integrity... 

Yes, all groups of people (even individuals) develop a moral code...  I wouldn't have much disagreement for you to say that "morality is the true currency of any society."  The trick of course is agreeing on what is "moral."  [hence why individuals can more easily determine their own moral codes, but why the process becomes much more convoluted when attempting to determine a group's.  There's even a decent litmus test for when an individual acts without integrity, guilt...  not so much when his or her actions with integrity conflict with the moral code of the group].

Your post is also inconsistent.  You claim that you can't trust people to behave a certain way because they don't have integrity, but if you know that they will cut your throat to benefit themselves, then you can trust how they will behave...  try out the philosophy for a day or two...  see how many times it is right and wrong...  and if more right than wrong than your present philosophy, adopt the new one...

giddy's picture

Don't forget trustworthiness. It's very underrated. Much different than trust.  Like water seeking its own level, one trustworthy party will recognize another trustworthy party.  Kyle is trustworthy.  Doesn't get better than that...

francis_sawyer's picture

I guess my point is I would like to get some clarification on whether paper and physical prices really separate

How's this for clarification?

I've already walked into 3 local coin shops today...

Nobody... NOT ONE was willing to sell me anything today, (rounds, bars, junk, NOTHING)...

1. they had plenty of inventory

2. they'd be willing BUYERS today

3. Out of chance, I casually mentioned that if I paid YESTERDAYS margin over YESTERDAYS spot, would they deal? They said 'maybe', but only for a small purchase (less than 10 oz.)...

That's 'boots on the ground" TODAY... Where she stops nobody knows...

fonzanoon's picture

I just called my place. Gold eagles $1,660 (about 4.5% over spot) Silver eagles were just under 32 bucks. They had plenty of both.

francis_sawyer's picture

I think that's basically what I'm saying...

There's NO PROBLEM with inventory... But they WERE NOT selling (SE's for example) at what was their traditional $1.50 over spot...

All the guys I talked to were just in a "wait & see" mode... But they WERE NOT going to sell a SE for under $30...

So yeah... You could 'offer' $32 to some guy & he might take it or he might not... But the feeling I get is that the PAPER PRICE could drop to $20 bucks tomorrow & you'd still be bartering for around $32 - $33...

We'll see...

Vagabond's picture

I had the same experience this past weekend in Springfield, MA.

Rynak's picture

Depends on geography too i guess. At my local dealer in germany, i have no problem getting maples, philharmonikers and krügerrands at near paper-spot price....

...however, anything else rapidly goes up in price at that shop, and they do have a notice on their website, that larger quantities even of the earlier mentioned coins may take a month or longer.

May be specific to the order-strategy of my shop, or by local market specific. Just putting the data here.

Also, everytime i'm visiting them, i'm chatting with them, and among other things also talk about their market situation. And the repeated impression i get, is that the amount of people buying is much higher than those selling.

So, at least regarding local dealers in the area of germany where i'm living, my impression is that there are signs of shortages... but not shortages strong enough to disrupt the local market yet.

And you need immediate shortages, to make physical prices seperate from paper prices. As long as this kind of full-frontal scarcity does not happen, you can point at fundamentals all day.... they won't matter, until there are immediate shortages.

johnu78's picture

What's the going cash value for food stamps these days?



LFMayor's picture

LOL, my M. I. L. is getting paid in them from one set of renters, if that's any clue.

stant's picture

ive heard liqour or dope

fadgadget's picture

truthfully, you can use somebody's EBT card at a 30-40% discount.  next time you go to the grocery store, start making eye contact with people near the checkout lines and in the parking lot when you're going in.

RafterManFMJ's picture

truthfully, you can use somebody's EBT card at a 30-40% discount.  next time you go to the grocery store, start making eye contact with people near the checkout lines and in the parking lot when you're going in.


Yeah I did that and got a black eye.

cgbspender's picture

I recently met someone who does this exact same thing. He told me that the going rate was 50% of the face value of the card. Crackheads are apparently the best "mark", as you can often times purchase a $600 card for $200 cash.

chubbar's picture

Cash, grass or ass! Nobody rides for free!

Hmm...'s picture

I watched this interview a few minute ago.

Perhaps the time to buy PMs would be early next year when the big banks start to collapse?

or is that too late?