Kyle Bass

Kyle Bass
J. Kyle Bass
Born (1969-09-07) September 7, 1969
Miami, Florida
Residence Dallas, Texas, United States
Nationality American
Alma mater Texas Christian University (B.B.A.)
Occupation Founder & Chief Investment Officer,
Hedge Fund Manager
Known for Hayman Capital Management, L.P.
Board member of

J. Kyle Bass (born September 7, 1969) is an American hedge fund manager. He is the founder and principal of Hayman Capital Management, L.P., a Dallas-based hedge fund focused on global event-driven opportunities.[1]

In 2008, Bass successfully predicted and effectively bet against the U.S. subprime mortgage crisis by purchasing credit default swaps on subprime securities which, in turn, increased in value when the real estate bubble burst.[2]

Bass has made prominent bets on Japan, European sovereign debt and, most recently, China.[2] He has also given his expectations regarding the economic future of Japan and Argentina.[3]

Despite his early success in predicting subprime mortgages, he has received criticism for some of his investments for their performance.[4]

Early life

Bass was born on September 7, 1969, in Miami, Florida, where his father managed the Fontainebleau Hotel. His father later moved the family to Dallas, Texas where he managed the Dallas Convention and Visitors Bureau.[5] Bass attended Texas Christian University on an academic and Division I diving scholarship. In 1992, Bass graduated with honors, earning a B.B.A. in finance with a concentration in real estate.[6]

Career

Before founding Hayman Capital Management, L.P. in 2005, Bass briefly worked at Prudential Securities from 1992-1994 before joining Bear Stearns in 1994.[7] At Bear Stearns, he rose through the ranks rapidly, becoming a senior managing director at the age of 28 – among the youngest in the firm's history to carry such a title.[2][6]

In 2001, he joined Legg Mason, signing a five-year deal to form the firm's first institutional equity office in Texas. Bass told his hiring managers, "In five years and one day, I [will] be launching my own firm."[7] While at Legg Mason, Bass advised hedge funds and other institutional clients on special situation investment strategies.[2]

In December 2005, when Legg Mason sold the portion of the business where he worked, Bass left Legg Mason and started Hayman Capital Management, L.P. to serve as the investment manager to a "global special situations" hedge fund that he planned to launch. Bass launched Hayman Capital Management, L.P. with $33 million in assets under management – $5 million he had saved on his own and the balance he had raised from outside investors.[7] Shortly after launching the hedge fund in February 2006, Bass became convinced that there was a residential real-estate bubble in the United States one of the few investors to successfully predict and benefit from the subprime mortgage crisis, bringing him notoriety in the financial services industry.

In 2007, Bass testified as an expert witness before the U.S. House Financial Services Subcommittee on Capital Markets and Government-Sponsored Enterprises. During his testimony, he addressed: i) the role of credit rating agencies in the structured finance market and ii) policy measures that could be taken to minimize inherent conflicts of interest between rating agencies and issuers.[8]

In 2010, Bass testified before the Financial Crisis Inquiry Commission. During his testimony, he addressed: i) key factors that contributed to the enormity of the crisis, ii) changes needed to restore the US banking system and iii) how to protect taxpayers from a future crisis.[9] In his opening statement, he said:

I believe that there is a role for leverage and for aggressive risk taking in the economy, but that role should be played by firms that are open and susceptible to the risk of insolvency and failure. Capitalism requires failure and bankruptcy as a consequence in order to guide behavior. As the old adage goes: ‘Capitalism without bankruptcy is like Christianity without hell.’ If we cannot allow a firm to go bankrupt, then we should regulate its activities so that it cannot engage in the sort of risky transactions that put it at risk of bankruptcy. To be clear, we should not prevent all firms from taking on leverage or engaging in risky behavior; we must ensure that they are not allowed to become Too Big To Fail.

— J. Kyle Bass, Testimony before the Financial Crisis Inquiry Commission, Hearing on the Financial Crisis

Hayman Capital

Subprime mortgages

Bass first began formulating his subprime strategy after he met with an investment banker from New York while attending a wedding in Spain where they discussed how and why the Subprime Mezzanine CDO business existed.[10][11] After returning to the US, Bass hired several private investigators to determine the ease of obtaining a mortgage. Bass spent a significant amount of time studying the residential mortgage market and performed research to identify which residential mortgage backed securities (RMBS) composed of low-quality mortgages were most likely to default. This investment thesis was expressed by purchasing credit default swaps against the securitizations he deemed to be most unstable, which essentially was a manner of shorting the bonds using synthetic instruments. After purchasing the positions for his flagship fund in 2006, Bass raised additional capital for a special fund dedicated exclusively to capitalizing on the opportunity that existed in the market place. Bass managed or advised over $4 billion of positions in subprime RMBS.

In December 2007, after a wave of foreclosures had swept across the US, Bass was featured on Bloomberg TV as making a fortune betting against these subprime securities. In April 2008, D Magazine, the Dallas city magazine, profiled Bass in an article entitled "Cashing in on Subprime." The tagline read: "The subprime crisis in the housing market has led to a financial crisis and fears of a recession. If only someone could have predicted it. Someone did. His name is Kyle Bass, and he made about half a billion dollars from it." [5] Author Michael Lewis, in his novel The Big Short, acknowledging Bass and others explained:

A small number of people—more than ten, fewer than twenty—made a straightforward bet against the entire multi-trillion-dollar subprime mortgage market, and, by extension, the global financial system. In and of itself it was a remarkable fact: The catastrophe was foreseeable, yet only a handful noticed.

— Michael Lewis, The Big Short: Inside the Doomsday Machine

National debt

After the subprime debt crisis occurred, Bass decided that it was the symptom of a more significant problem with debt. Examining data on Europe, Japan, and the U.S., he concluded that high levels of government debt led to public defaults. In other words, he believed the financial crisis far from concluded. Over the next three years, he said in 2009, he warned of several potential defaults by major countries.[12] As of 2010, 10-15% of his portfolio was involved in bets against European and Japanese sovereign debts.[13] He predicted that 2012 would be a "doomsday year" for Europe and spoke of a looming breakup of the Eurozone, which, he declared, would lead to defaults in Japan and the United States.

He stated in June 2012, "Europe goes first, then Japan and finally the United States."[14] In a speech reported on January 1, 2014, he assured the audience of his confidence that the next few years would be rife with turmoil, including the eruption of major wars. In his speech, he claimed that with the growing debt and inability to pay it off, eventually social unrest will lead to violent outbreaks. Bass finished his speech stating "War is coming – just as it has throughout history." [15]

Greece

On September 14, 2011, Bass maintained on CNBC that Greece's only way out of its debt mess was a restructuring. Bass noted that despite the strife it would bring to Greece it was the only measure the nation could take. He added that within a year all of Europe would be in default as well.[16]

Japan

For several years, Bass has been predicting impending financial crisis for Japan, describing its approach to financing debt as a Ponzi scheme similar to Bernie Madoff's investment scam. Most experts have disagreed with his analysis.[17] Cullen Roche criticized Bass's Japan analysis in August 2010, noting that Bass comparing Japan to the EU was an error, since their monetary systems are wildly different. Roche stated "people still fail to understand that a nation with monetary sovereignty that is the supplier of currency in a floating exchange rate system never has a problem funding itself."[18] In May 2012, Business Insider agreed, faulting Bass's analysis, since debt-to-GDP ratios do not reflect the interest rate or credit risk of a nation. The Business Insider noted that in a nation that borrows its own currency, public spending finances borrowing.[19] In February 2013, Jesper Koll, Japanese equity expert at JP Morgan Securities Japan, weighed in with what Stephen Harner of Forbes called a "highly persuasive rebuttal to Bass" on Japan.[20]

Argentina

The BBC has described Bass as having a "good relationship" with Argentina's president Cristina Fernandez de Kirchner.[21] In February 2014, Bass said that Argentinian bonds represented a profitable opportunity and called Argentina most "interesting" nation for investments. He was virtually alone in this assessment, with one observer noting the poor state of the Argentine economy. The IB Times noted that the country had "cheated creditors seven times since it gained independence from Spain in 1816," most recently defaulting on its debt in 1989.[22]

When the Argentine government defaulted on its debt in July 2014, Bass supported the move and criticized the bondholders, notably Elliott Management and Aurelius Capital, that, with the support of U.S. federal judge Thomas Griesa, had held out for full payment. Echoing Argentine President Cristina Fernandez de Kirchner, he called these creditors "vultures," said that they were "holding up 42 million people from progress," and were holding Argentina for "ransom".[23] On August 27, 2014, Bass accused Elliott's Paul Singer of "holding poor countries as hostages," prompting The New York Post to comment in an editorial the next day that Bass had "sounded more like Argentina's leftist economy minister Axel Kicillof than a US hedge-fund manager." [24]

General Motors

In April 2014, Bass, noted the New York Times, was among a very few defenders of General Motors automobile manufacturer for its failure to address a defect that had been tied to 13 deaths. Bass, whose fund at the time owned eight million shares of G.M., making it Hayman's single biggest holding,[25] said on CNBC that of the 13 passengers who had died owing to the defect, 12 "either weren’t wearing their seatbelt or were under the influence of alcohol." [26] Bass admitted on October 22, 2014, that 2014 had been "a tough year" for Hayman due to his GM position, which remained the fund's biggest position.[27]

Challenging drug patents

In 2015, Bass formed the Coalition For Affordable Drugs (CFAD) in order to challenge pharmaceutical patents.[28] Bass used the inter partes review (IPR) process, which was created by Congress to streamline challenges to patent validity, to go after drug companies that he saw as "the most egregious examples of those extending their patents at the expense of Medicare, Medicaid and American patients."[29][30] When he initiated this practice in January 2015, he claimed that his motive was to encourage competition in the manufacture of pharmaceuticals and thus bring down prices.[31] “This is going to lower drug prices for Medicare and for everyone,” he said, promising that the targeted pharmaceutical firms would get “knee capped” by his challenges. Patent expert Scott A. McKeown, calling Bass a “patent troll,” wrote in response: “Mr. Bass may be the only one about to be 'knee capped,' and rightfully so.”[32]

Bass filed a total of 35 patent challenges, in collaboration with Erich Spangenberg who has been called “the world's most notorious patent troll”,[4] including 33 filed by CFAD and two filed by Bass personally on a not-for-profit basis.[33] The Patent Trial and Appeal Board instituted trial on 20 of the petitions and denied trial on 15 of the petitions, giving Bass a 57% institution success rate.[33]

His patent challenges drew controversy from drug companies who criticized Bass for trying to profit from successful challenges that may pressure a company's revenue and shares. When drugs come off patent and can be sold by generic drug makers, their prices plummet.[28] Profit was a motive for Bass, but he insisted he was not alone in this as the pharmaceutical companies targeted were also focused on profit. Bass stated, "At the heart of nearly every patent...the motivation is profit."[34] Bass has cautioned, "This system must be fixed or we will continue to pay more and more for the same old drugs we’ve been buying for decades".[28]

When his main target in these patent challenges, Celgene Corp., accused him of abusing the patent-review process for his own enrichment, Bass replied through the CFAD that “Celgene is not giving...its profits away....It should be axiomatic that people do not undertake socially valuable activity for free.”[31][35] In June 2015, Celgene received permission from the U.S. Patent and Trademark Office to file a motion seeking sanctions against the CFAD for allegedly abusing the patent-review process. The Wall Street Journal noted that this development was “being closely watched because it raises the possibility that patent officials may put an end” to Bass's patent-challenge scheme. Celgene also told the patent office, through counsel, that CFAD had threatened to challenge its patents unless Celgene met CFAD’s demands, however this statement was never substantiated with any documentation during the course of the USPTO PTAB proceedings.[36][34][37] In October 2016, Bass prevailed in the case, with USPTO invalidating the two Celgene Corp patents related to its cancer drugs Revlimid, Pomalyst, and Thalomid at issue.[38] However, one year later Celgene was able to convince the Patent Trial and Appeal Board to re-hear the case.[39]

Bass was recognized as one of the top 25 most influential people in the global patent market by Intellectual Asset Management (IAM) magazine in 2015.[40]

Fund performance

Since Hayman Capital's inception in 2006, the fund has returned 436.75% and an annualized return of 16.7%.[41] In 2007, Hayman earned 212% by shorting subprime mortgages. In the next 8 years, the fund averaged 1.56% annualized.[42]

Philanthropy

Bass serves on the board or in an advisory role for a number of charities and organizations, including (past and present affiliations):

  • University of Texas System Investment Management Company (UTIMCO), the largest public university endowment in the United States with over $30 billion in assets under management.[43][44]
  • University of Virginia Darden School of Business Advisory Group for the Richard A. Mayo Center for Asset Management, a research center that advances the study and practice of asset management.[45]
  • Texas Department of Public Safety Foundation, a foundation that raises private funds to support law enforcement efforts.[46]
  • Troops First Foundation, a nonprofit organization that works to provide meaningful assistance to military service members.[47]
  • Business Executives for National Security, a nonpartisan and nonprofit organization that supports the U.S. government in applying best business practices solutions to the most difficult national security problems.[48]
  • Comeback America Initiative, a nonpartisan organization dedicated to promoting fiscal responsibility and sustainability.[49]
  • Capital for Kids, a network that supports organizations that educate, protect and encourage at-risk children.[50]

References

  1. ↑ "Biography". Milken Institute. 1 May 2016.
  2. 1 2 3 4 Carney, John (March 29, 2016). "Kyle Bass, The Man Who Shorted The World". The Wall Street Journal.
  3. ↑ Fisher, Daniel (January 21, 2010). "The Global Debt Bomb". Forbes.
  4. 1 2 McTague, Jim (13 August 2015). "Kyle Bass' Comeback Plan: Oil, Argentina and Patents". Barron’s.
  5. 1 2 Hanley, Craig (January 21, 2010). "Cashing in on Subprime". D Magazine.
  6. 1 2 "Kyle Bass – Hayman Capital". OctaFinance. OctaFinance Ltd. 2015.
  7. 1 2 3 Drobny, Steven (December 30, 2015). "Don't Mess With Texas, An Interview with Kyle Bass". The New House of Money.
  8. ↑ Bass, Kyle (September 27, 2007). "Hearing of the Role of Credit Agencies in the Structured Finance Market, Testimony of J. Kyle Bass" (PDF). House Financial Services Committee.
  9. ↑ "Testimony before the Financial Crisis Inquiry Commission, Hearing on the Financial Crisis" (PDF). Financial Crisis Inquiry Commission. January 13, 2010.
  10. ↑ Murphy, Paul. "The full subprime letter from Hayman's Kyle Bass". FT Alphaville. Retrieved 22 April 2016.
  11. ↑ "House of Cards" interview CNBC, 2009
  12. ↑ "Hayman Capital's Kyle Bass Predicts Sovereign Defaults". market folly. 15 May 2009.
  13. ↑ "Kyle Bass Betting Against Japanese Government Bonds (JGBs)". market folly. 18 August 2010.
  14. ↑ Nilsen, Sverre Rørvik (20 June 2012). "Kyle Bass: - This is the formula behind my investments". E24.
  15. ↑ Slavo, Mac (1 January 2013). "Kyle Bass: You Know How This Ends Right? This Ends Through War…". Market Daily News.
  16. ↑ "KYLE BASS WITH DAVID FABER - 'GREECE WILL DEFAULT AND IT'S GOING TO BE UGLY FOR EUROPE, GERMANY AND THE U.S.' (17 BAILOUTS FOR 17 EURO NATIONS)". The Daily Bail.
  17. ↑ Wolinsky, Jacob (15 May 2012). "Kyle Bass' Japan Macro Fund Down 29% for April". Value Walk.
  18. ↑ "THE "KEYNESIAN END POINT"?". Pragmatic Capitalism.
  19. ↑ Weisenthal, Joe (20 May 2012). "Kyle Bass's Most Famous Trade Is A Disaster, And It Is Never Going To Work Out". Business Insider.
  20. ↑ Harner, Stephen (11 February 2013). "Cooler Heads: The Rebuttal to Kyle Bass's Japan Market Meltdown Scenario from JPMorgan's Jesper Koll and Masaaki Kanno". Forbes Magazine.
  21. ↑ Justo, Marcelo (2 September 2014). "Los inversores que apuestan por Argentina a pesar del "default"". BBC Mundo.
  22. ↑ Rochan, M (4 February 2014). "US Hedge Fund Hayman Capital Bets on Argentine Bonds Despite Default Risk". International Business Times.
  23. ↑ Kelly, Kate (24 September 2014). "Kyle Bass big on Argentina; rips 'immoral' competitors". CNBC.
  24. ↑ Celarier, Michelle (28 August 2014). "Hedgie Kyle Bass crying as Singer, Argy dispute deepens". The New York Post.
  25. ↑ Stevenson, Alexandra (15 April 2014). "Hedge Fund Manager Makes Lonely Defense of G.M." The New York Times DealBook.
  26. ↑ VW Staff (16 April 2014). "Kyle Bass Bullish On GM, But Still Thinks Japan A Disaster". Value Walk.
  27. ↑ "Hayman still owns General Motors". CNBC.
  28. 1 2 3 Morgenson, Gretchen (November 27, 2015). "Working to Lower Drug Costs by Challenging Questionable Patents". The New York Times.
  29. ↑ La Roche, Julia (October 19, 2016). "Some Drug Patents Are 'Un-effing Believable'". Yahoo Finance.
  30. ↑ Motl, Ann (September 30, 2015). "Inter Partes Review: Ensuring Effective Patent Litigation Through Estoppel" (PDF). Minnesota Law Review.
  31. 1 2 Decker, Susan (October 19, 2016). "Kyle Bass Says So What If He Challenges Drug Patents for Profits". Bloomberg. Retrieved 20 February 2017.
  32. ↑ McKeown, Scott A. (15 January 2015). "The PTAB as a Hedge Fund Tool?". Patents Post-Grant.
  33. 1 2 Loney, Michael (June 13, 2016). "Kyle Bass IPRs End Up with 57% Institution Success Rate". Managing Intellectual Property.
  34. 1 2 Silverman, Ed (26 June 2015). "Celgene May Seek Sanctions Against Kyle Bass Over Patent Challenges". The Wall Street Journal.
  35. ↑ "Kyle Bass responds to criticisms". IP Pro Life Sciences. 17 August 2015.
  36. ↑ "UNITED STATES PATENT AND TRADEMARK OFFICE". USPTO. Retrieved 12 May 2016.
  37. ↑ "UNITED STATES PATENT AND TRADEMARK OFFICE BEFORE THE PATENT TRIAL AND APPEAL BOARD" (PDF). FDA News. Retrieved 17 May 2016.
  38. ↑ Pierson, Brendan (28 October 2016). "Fund manager wins challenge to Celgene drug safety patents". Reuters. Retrieved 17 November 2017.
  39. ↑ Mock, Jason (20 September 2017). "Celgene Notches Rare Win On PTAB Request For Rehearing". PharmaPatents. Foley & Lardner LLP. Retrieved 17 November 2017.
  40. ↑ Lloyd, Richard (October 5, 2015). "The 40 Individuals Who Drive the Global Patent Market". IAM Magazine.
  41. ↑ La Roche, Julia (January 4, 2017). "Kyle Bass:Global Markets are at the Beginning of a Tectonic Shift'". Yahoo Finance.
  42. ↑ Michelle Celarier (August 22, 2015). "Kyle Bass' post-crash returns small-caliber". New York Post.
  43. ↑ "Board of Directors". University of Texas Investment Management Company. 30 May 2016.
  44. ↑ "Richest Public Universities in America". Business Insider. 25 March 2016.
  45. ↑ "Board of Directors". University of Virginia. 30 May 2016.
  46. ↑ "Board of Directors". Texas Department of Public Safety. 30 May 2016.
  47. ↑ "Board of Directors". Troops First Foundation. 30 May 2016.
  48. ↑ "Texas Leadership". Business Executives for National Security. 18 July 2016.
  49. ↑ "Leadership & Staff". Comeback America Initiative. 18 July 2016.
  50. ↑ "Board of Directors" (PDF). Capital for Kids. 1 April 2011.
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