Thursday, September 15, 2011

Kyle Bass On CNBC Yesterday

I saw Kyle Bass' appearance yesterday on David Faber's noontime CNBC program which originated from the Seeking Alpha conference.

Bass was on as a guest in order to solicit his unvarnished, blunt opinions regarding the European financial troubles. Specifically, the sovereign debt problems of Greece, Spain, Ireland and Italy, and the accompanying potential insolvency of European banks holding said paper.

When asked for his reaction to US Treasury Secretary Geithner's contention, in an interview earlier that day on CNBC, that no European bank would be allowed to fail "like Lehman did," Bass replied that, technically, he agreed with and believed Geithner's assertion. European regulators, Bass said, would not let any of their large banks just collapse as the US allowed Lehman to do. But in the next breath, Bass said,

'That doesn't mean the equity of those banks is worth anything. Nor their debt.'

He then proceeded to enumerate the problems he saw for any simple Euro-solution, including the myth of a single European-wide TARP-like fund.

In effect, in one sentence, Kyle Bass demolished Geithner's attempt to soothe markets regarding the European financial crisis and revealed the Treasury secretary's insistence that there won't be a European Lehman as a distinction without any real difference.

Then Bass said something which I'll return to, again, in a later post about Michael Lewis' The Big Short. Bass referred to primary market research which his fund commissioned among German citizens to ascertain the opinions of that nation's residents to bailing out the rest of Europe.

This sort of on-the-ground, gritty detailed research was also the hallmark of Bass and others during the building mortgage-backed securities fiasco of 2007-08. It temporarily stunned me that here was a hedge fund manager actually having extensive primary research conducted in order to better his odds of correctly resolving what he called, several times, the game theory problem of how the European financial system will evolve through the default, by whatever name you wish to call it, that Bass sees as inevitable and unavoidable.

Mind you, as far back as last summer and fall, Bass was on CNBC warning viewers that the apparent market values of sovereign debt, and the health of the region's large banks, were not accurate. That the situation was far more dire than it appeared.

I respect and very much enjoyed Bass' detailed explanation of the processes actually necessary, including, to use his term, 'that messy democratic process' of individual country legislatures voting to enact their individual TARP-like funds. I can't possibly capture in this piece the intensity and density of Bass' remarks, but they were extremely convincing on several points.

First, there will be European country defaults. Second, there will be corresponding private sector bank insolvencies. Third, a lot of money will be lost by holders of securities issued by the defaulting countries and bankrupt banks. Fifth, the effect on the US will involve both capital losses and overall economic trade reductions. Sixth, after all this, the global financial and economic systems will then have to pick up and move along, losses absorbed, and work with the resulting situations.

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