kyle bass testimony before congress
TRANSCRIPT
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JKyleBass
ManagingPartner
HaymanAdvisors,L.P.
Testimonybeforethe
FinancialCrisisInquiryCommission
Hearingon
The
Financial
Crisis
January13,2010
ChairmanAngelides,ViceChairmanThomas,mynameisKyleBass,ManagingPartnerofHayman
Advisors,L.P.andIwouldliketothankyouandthemembersoftheCommitteefortheopportunityto
sharemyviewswithyoutodayasyouconsiderthecausesoftherecentcrisisaswellascertainchanges
thatmust
take
place
to
avoid
or
minimize
future
crisis.
Ibelieve
that
Ihave
somewhat
of
aunique
perspectivewithregardtothiscrisisasmyfirmandIwerefortunateenoughtohaveseenpartsofit
coming. Haymanisaglobalassetmanagementfirmthatmanagedseveralbilliondollarsofsubprime
andaltamortgagepositionsduringthecrisis,andweremainanactiveparticipantinthemarketplace
today. WhileIrealizethattheprimaryobjectiveofthehearingtodayistoprovidebaselineinformation
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onthecurrentstateofthefinancialcrisisandtodiscusstherolesthatfourspecificbanksorinvestment
banks(GoldmanSachs,MorganStanley,BankofAmerica,andJPMorgan)playedinthecrisis;inmy
opinion,nosinglebankorgroupoflargeinstitutionssinglehandedlycausedthecrisis.WhileIwill
addresseachparticipantsstructureandproblemsindependentlylaterinmytestimony,theproblems
withtheparticipantsandtheregulatorystructureneedstobeconsideredmoreholisticallyinorderto
preventfuturesystemicbreakdownsandtaxpayerharm. Whiletherearemanyfactorsthatledtothe
crisis,IwilladdresswhatIbelievetobethekeyfactorsthatcontributedtotheenormityofthecrisis.
TheOTCDerivativesmarketplace,withthenearly infinite leverage itaffordedandcontinuestoafford
thedealercommunity,mustbechanged. AIG,BearStearnsandLehmanwouldnothavebeenableto
takeonasmuchleverageastheydid,hadtheybeenrequiredtopostinitialcollateralondayoneforthe
riskpositionstheyassumed. Assetmanagementfirms,includingHayman,havealwaysbeenrequiredto
postinitial
collateral
and
maintenance
collateral
for
virtually
every
derivatives
trade.
However,
in
AIG's
case, theydidnothave topostcollateralevenafter thepositionsmovedagainst them (the socalled
variancemargin). Thedealercommunity,aswellasothersupposedAAAratedcounterparties,were
(andsomestillare)abletotransactwithoneanotherwithoutsendingcollateralfortheriskstheyare
taking. Thesocalled"initialmargin"was,andstillis,onlychargedtocounterpartiesthataredeemedto
beoflessercreditquality. Imagineifyouwerea28yearoldmathematicssuperstaratAIGFinancial
ProductsGroupandyouwerecompensatedattheendofeachyearbasedupontheprofitabilityofyour
tradingbook,whichwasultimatelybaseduponrisksyouwereabletotakewithoutinitiallypostingany
money. Howmuchriskwouldyoutake? Theunfortunateanswerturnedouttobemanymultiplesthe
underlying equity ofmany of the firms in question. In AIG's case, the risks taken in the companys
derivativesbookweremore than 20X the firm's shareholder's equity. For a comprehensive look at
leverageratiosofselectedcompaniesattheendoffiscalyear2007,pleaserefertoExhibit1 included
below. TheUStaxpayerisstillpayinghugebonusestothemembersofAIG'sFinancialProductsGroup
becausetheyhaveconvincedtheoverseersthattheypossesssomeuniqueskillsetnecessarytounwind
thesecomplexpositions. Inreality,therearehundredsofoutofworkderivativestradersthatwould
happilytake
that
job
for
$100,000
ayear
instead
of
the
many
millions
paid
to
these
supposed
"experts".
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SolvingaLargePartoftheOTCDerivativeProblem
Inthelistedmarketsforequityoptionsandfuturesoptions,youdonothearaboutthesemarkets
causingsystemicproblems,andthereisawellreasonedanswerforthisthereisarequiredcollateral
depositfor
taking
risk
that
is
applied
to
all
participants
(regardless
of
their
credit
rating).
The
requirementismandatedandsupervisedbyFINRA(FinancialIndustryRegulatoryAuthority). Again,if
participantshadtopostinitialcollateralinordertotakerisk,thederivativesmarketplacewouldnot
havemutatedintothemonsteritistoday. Ibelievethismarketwouldbehalfthesizeitistodayif
participantswereforcedtofollowthisonesimplerule.
Inordertohelpreducesystemicproblemsbroughtaboutbyderivatives,Congressandregulatorsneed
toimplementanewsystemthathasthreekeyaspects:
1. HomogenousminimumcollateralrequirementsallparticipantsintheDerivativesmarketplaceshouldberequiredtopostcapitalbaseduponaformulaicdeterminationofriskbythe
appropriateregulatorybody.Thiswouldpreventfirmsfromestablishingsystemicallyrisky
derivativespositionsbyattachingamarginalcosttotheestablishmentofeachnewposition,
thuspreventingtherecurrenceofanAIGtypescenariowherehundredsofbillionsofdollarsin
riskisassumedwithnocost.Toputthecurrentsituationintocontext,in2000,theFDICBanking
Review (Volum13,No.2)estimatedtheentirecostoftheSavings&LoanCrisistotheUS
taxpayerto
be
$124
billion.
By
comparison,
AIG
alone
has
been
given
$183
billion
in
taxpayer
funds.
2. Centralizedclearingandmandatorypricereportingofallstandardized(nonbespoke)CDS,FX,andinterestratederivatives(accordingtoDTCC,roughly90%ofallCDScontractsare
standardizedandcouldeasilybeclearedinthismanner).
3. CentralizedDataRepositoryforallclearedandnonclearedderivativestrades,allowingtheappropriateregulatortomonitorexposuresbydealerandcounterpartytomonitorsystemic
risk.
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BankLeverage
AfundamentaltenetoftheUSbankingsystemisleverage. Usingcurrentregulatoryguidelines,banks
aredeemed"wellcapitalized"with6%Tier1capitaland"adequatelycapitalized"with4%Tier1capital
basedupon
risk
weighted
assets
(as
an
aside,
the
concept
of
risk
weighted
assets
should
also
be
reviewed). Thisinturnmeansawellcapitalizedbankislevered16XtoitsTier1capital(muchmoreto
itstangiblecommonequity)andanadequatelycapitalizedbankis25XleveredtoitsTier1capital. How
manyprudentindividualsorinstitutionscanpossiblymanageaportfolioofassetsthatis25Xlevered?
Again,unfortunately,theanswerhasturnedouttobenotmany.Ofthe170banksthathavefailed
duringthiscrisis,theaveragelosstotheFDICiswellover25%ofassets,ormoreimportantly6times
theirminimumlevelsofregulatoryequity. DepositoryinstitutionslikeCitibankwereabletoparlaytheir
depositsintolargeleveredbetsinthederivativesmarketplace. Infact,atfiscalyearend2007,Citigroup
was68.4Xleveredtoitstangiblecommonequity,includingoffbalancesheetexposures. Accordingto
thefollowingtable,realleverageattheinstitutionsinquestiongotcompletelyoutofhand:
Exhibit1:On andOffBalanceSheetLeverageofMajorUSFinancialInstitutions
Clearly,thecompositionoftheseassetsisimportantaswell,butIamsimplytryingtoillustratehow
leveredthesecompanieswereatthestartof thefinancialcrisis. WhileAIG'sderivativebookwasonly
20Xleveredtobookequity,$64billionofthosederivativeswererelatedtosubprimecreditsecurities,
themajorityofwhichwereultimatelyworthzero(against$95BoftotalequityasofDec2007).
Insome
cases,
the
excessive
leverage
cost
the
underlying
company
many
years
of
lost
earnings
and
in
othercases,itcostthemeverything. Somecompaniesfaredmuchbetterthanothersandhaveactually
shownaprofitoverthepasttwoyears. Thoseprofitsmayhavebeenadirectresultoftaxpayer
infusionsandgovernmentguaranteesofdebt,facilitatingthepumpingofcheapmoneyintofailing
AllasofFiscalyearend2007(Nov31,2007orDec31,2007)
Lehman Bear Wachovia Wamu Goldman BofA MS JPMorgan WellsFargo Citi
GrossLeveragetoTangibleEquity 37.6x 35.6x 18.0x 15.3x 26.2x 21.2x 36.3x 17.5x 16.9x 32.2x
GrossLeveragetoTangibleCommonEquity 40.0x 36.8x 23.3x 18.8x 32.4x 28.8x 40.1x 21.1x 17.0x 35.0x
OffBalanceSheetExposures
TangibleCommonEquity/TotalAssets+Commitments(1) 1.9% 2.6% 3.6% 3.9% 2.7% 1.8% 2.3% 2.3% 4.1% 1.5%
Gross
Leverage
to
Tangible
Common
Equity 52.3x 38.1x 27.7x 25.8x 36.8x 54.3x 44.3x 44.4x 24.2x 68.4x
Level3Assets/TangibleCommonEquity 225.2% 262.0% N/A N/A 199.8% 52.8% 222.2% 58.1% 67.2% 213.4%
Source:SNLFinancialand10Ks.
(1)CommitmentsIncludecontingentloansthatmaybe,asoffiscalyearend2007,fully,partiallyornotcommitted.
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enterprisestoallowthemtoattempttoearntheirwayoutoflossesresultingfrombadassetsonthe
books.Below,wehavecompiledatableforyearsoflostearningsduetothecreditcrisis:
Exhibit2:CumulativeNetIncomeandLossofFinancialInstitutionsSinceQ32007
TheMostLeveredofThemAll FannieandFreddie
With$5.5trillionofoutstandingdebtandMortgageBackedSecuritiesGuarantees,thequasipublicor
nowinconservatorshipFannieandFreddiehaveobligationsthatapproachthetotalamountof
governmentissuedbondstheUScurrentlyhasoutstanding. Therearesomanythingsthatwentwrong
orarewrongatthesesocalledGSEsthatIamnotsurewheretostart. First,whyweretwoforprofit
companieswithboards,shareholders,charitablefoundations,andlobbyingarmsevergiventhe
"implicit"backingoftheUSGovernment?TheChinesewon'tbuythemanymoreonlybecauseour
governmentwon'tgivethemtheexplicitbacking.TheUSgovernmentcannotgivethemtheexplicit
backingbecausetheresultingfederaldebtburdenwillcrashthoughtheCongressionallymandateddebt
Cumulative
NetIncome
(Loss):3Q07
FannieMae (120,459)$ >20.5years
AIG (103,572)$ >17.5years
FreddieMac (67,904)$ >11.5years
MerrillLynch* (37,492)$ >11.0years
Wachovia* (31,608)$ >4.5years
WashingtonMutual* (6,148)$
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ceiling(whichwasrecentlyraisedtoaccommodatemoredeficitspending). Theseorganizationshave
beensomeofthesinglelargestpoliticalcontributorsintheworldoverthepastdecadewith$200
millionbeinggivento354lawmakersinthelast10yearsorso.Yes,theUnitedStatesneedslowcost
mortgages,butwhyshouldorganizationscreatedbyCongresshavetolobbyCongress? Fannieand
Freddieusedthemostleverageofanyinstitutionthatissuedmortgagesorheldmortgagebacked
bonds.Atonepointin2007,Fanniewasover95Xleveredtoitsstatutoryminimumcapitalwithjust18
basispointssetasideforlosses. That'sright,18onehundredthsofonepercentsetasideforpotential
losses. Theymustnotbeabletoputhumptydumptybacktogetheragain. Iftheyaretoexistgoing
forward,FannieandFreddieshouldbe100%governmentowned,andthegovernmentshouldsimply
issuemortgagestothepopulationoftheUnitedStatesdirectlysincethisisessentiallywhatisalready
happeningtoday,withtheaddedburdenofsupportingaprivatelyfunded,andarguablyinsolvent,
capital
structure.
WhenDr.Greenspantradedthedotcombustforthehousingboomintheearly2000swithhis
extremelyaccommodativemonetarypolicy,thedamagetoFannieandFreddiewaswellunderway,and
ultimatelyresultedintheaccountingscandalsandbalancesheetdebaclesthatwereinitiallyidentifiedat
thoseinstitutionsin2003(Freddie)and2004(Fannie). Followingtheforcedresignationofthesenior
officersatFannieresultingfromanSECinvestigation,concernsoverquestionablefinancesand
accountingpracticeswerelargelysubdued,andCongressundertooktoenactregulatorychangesto
rectifycurrent
issues
and
prevent
future
ones.
As
you
recall,
the
House
Financial
Services
Committee
putforthaproposalinMay2005toaddresssuchproblems.
Atthetime,privatecompetitorsandcertainWhiteHouseofficialswerecriticaloftheproposedreform,
claimingthatitwasnotstringentenough,didnotaddressalloftherelevantissues,andkepttoomuch
powerinthehandsofthesetwoinstitutions. Iwouldnotbesittingbeforeyouoverfourandahalf
yearslaterhadthesecriticsnotbeenprovencorrect.
Inanattempttoaddressourcurrentcrisis,theTreasuryDepartmententeredintoagreementsin
September2008withFreddieandFannietopurchaseupto$100billionofseniorpreferredstockin
eachofthetwoentitiesandtoplacethetwofirmsintoaconservatorship. TheTreasurysownFAQand
associatedansweronthedealstated:
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Whyisthepreferredstockpurchaseagreementlimitedto$100billion?Isthatenoughtoprotectagainsteventheworstdownsidescenario?Whathappensiflossesexceed$100billion?
Treasurydeliberatelychosealargenumbertogiveconfidencetothemarkets.
Yet,inFebruary2009,theTreasuryincreaseditsfundingcommitmenttoFannieandFreddiebyanother
$100billioneachtoanewtotalofupto$200billionperinstitution. Recently,onDecember24,2009,
theTreasuryagreedtoprovideunlimitedsupportforthenextthreeyears. Atthispoint,theUS
taxpayerisonthehookforwhateverlossesoccurtoeitheroftheseinstitutions. Themostobvious
questionis:Whyaretheshareholdersandotherunsecuredcreditorscontinuingtoreceiveafreerideon
thetaxpayersnickel? Among,thelargestunsecuredcreditorsaretheverybanksthataretestifying
herewithmetoday. WhileCongressandtheAmericanpeopleareoutragedattheperceivedbackdoor
bailoutsthat
several
institutions
received
via
the
AIG
rescue
and
the
lack
of
transparency
as
to
who
indirectlygotthemoneyandwhynohaircutsontheremainderofthecapitalstructurewereconsidered,
thesesamequestionsshouldberaisedinthecontextofFannieandFreddie.
Ifthegoaliskeepingpeopleintheirhomesandprovidingasystemwherepeoplecanindeedget
financingtopurchasehomes,continuingtofunnelmoneythroughtheGSEstootherfinancial
institutionsisnotthewaytodoit. Weshouldsimplyredirecttheguaranteestodirectlyhelp
homeowners.
Oneofthepremisesofputtingtheseinstitutionsintoconservatorshipwasthatovertimetheseentities
wouldshrinktheirbalancesheets. Yet,byyearend2009,theirbalancesheetswillbecollectivelylarger
todaythantheywereatalmostanytimeduringtheprior5years. Congressshouldconsiderstopping
thisridiculousnessandwindingtheseinstitutionsdownatthesharedexpenseoftheircreditorsrather
thantheUStaxpayer.
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Exhibit3:LeverageSummaryofFannyMaeandFreddieMac
ProtectingtheTaxpayerfromFutureCrisesandRestoringtheUSBanking
System
Ibelievetherearethreeimportantchangesthatarenecessarytoprotectthetaxpayerfromfuturecrisis
andrestore
the
US
banking
system
to
its
historically
strong
position.
First,
it
is
imperative
to
separate
depositoryinstitutionsfromproprietarycapitalgroupsandderivativestraders. Wecannothave
systemicallyimportantdepositoryinstitutionstakingenormousrisksinthederivativesmarketplace.
Second,Ithoughtwelearnedthatoffbalancesheet=BADduringtheEnronandWorldcomfiascos.
Bringallrisksandleveragebackonthebalancesheetinorderforregulatorsandinvestorstobeableto
compareapplestoapples. Third,wemustdetermineif25Xleverageisthecorrectminimumlevelof
capitalization. Mandatinga10%capitalbalancedoesnotseemtoofarawayfromwhereweneedtobe.
10Xleverageisplenty,anditstillmightnotbestringentenoughinanenvironmentwherewehavea
multistandard
deviation
event
and
10%
losses
become
the
norm.
TheUSBankingsystemcurrentlyhas8,099insuredinstitutions(after170havefailedinthiscrisis). The
compositionofthesystemshouldalsobereviewedasthetop4bankshave41%ofdepositsand45%of
bankassets. TheUSbankingsystemhasdevelopedintoatopheavyinstitutionitselfwith
concentrationslikethis.Regulatorsmustdecidewhattheindividualinstitutionconcentrationlimits
Asof12/31/2007($inthousands) FannieMae FreddieMacTotalAssets+LoanGuarantees 3,039,886,000$ 2,164,673,000$Leverage
to
Total
Equity 69.1x 81.0x
Leverage toCoreCapital(seebelow) 67.0x 57.1xLeverage toStatutoryMinimumCapital(seebelow) 95.2x 81.7xAllowance% 0.18% 0.31%
*2.50%
of
on
balance
sheet
assets;
*0.45%oftheunpaidprincipalbalanceofoutstandingFannieMaeMBSheldbythirdparties;and
*upto0.45%ofotheroffbalancesheetobligations, whichmaybeadjustedbytheDirectorofFHFA
undercertaincircumstances.
FromFannieMaeandFreddieMacfilings:StatutoryMinimumCapitalRequirement. Theexistingratiobasedminimumcapitalstandardtiesourcapitalrequirementstothesizeofourbookofbusiness.Forpurposesofthestatutoryminimumcapital
requirement,weareincomplianceifourcorecapitalequalsorexceedsourstatutoryminimumcapital
requirement.Corecapitalisdefinedbystatuteasthesumofthestatedvalueofoutstandingcommonstock(commonstocklesstreasurystock),thestatedvalueofoutstandingnoncumulativeperpetualpreferred
stock,paidincapitalandretainedearnings, asdeterminedinaccordancewithGAAP.Ourstatutoryminimum
capitalrequirementisgenerallyequaltothesumof:
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shouldbetopreventtoobigtofail(TBTF)problemsalloveragain. Maybebankingshouldbede
centralizedandmoreregionaltopreventanyoneinstitutionfrombecomingTBTF.
Exhibit4:BreakdownofDepositsandTotalAssetsHeldbyMajorUSFinancialInstitutions
Deposittakinginstitutionsshouldnotbeabletoleverageandbetinthederivativesmarketplace. The
factthatthetaxpayerwasessentiallyforced(inthespiritofsystemicriskreduction)tobuyequityin
Citigroupratherthanbeseniortoexistingcreditors/bondholdersisanaffronttotheUStaxpayer. There
needsto
be
aframework
for
how
taxpayer
money
is
invested
in
for
profit
corporations,
and
Ibelieve
the
repealoftheGrammLeachBlileyActisnecessary.FormerFederalReserveChairmanPaulVolckerhas
suggestedareturntotheprinciplesoftheGlassSteagallActof1933wherecommercialbankingwas
forciblyseparatedfrommostproprietarycapitaltransactions.Iendorsethisconcept;itisonepartofa
necessarysetofreformstocurtailtheriskyactivitiesofsocalledTBTFinstitutionsandacknowledges
thattheroleandimportanceofsomeinstitutionsdemandstightregulation.
Attheheartofthecurrentcrisishasbeentheemergenceofsystemicallyimportantinstitutionsthat
havebeen
exposed
to
so
much
risk
that
adverse
events
have
driven
them
into
insolvency.
Standard
markettheorysuggeststhatfirmsthatadopttoomuchriskleavethemselvesopentoinsolvencyand
failurethisshouldactasasuitabledisincentivetoexcessiverisktaking.Ibelievethat,inaperfect
world,themarketforcesshouldbecompletelyfreetoregulateandcastjudgmentuponafirms
behaviorrewardingandpunishingitwithnosafetynetsortaxpayerbailouts.Howeverwedonotlive
JPMorgan11%
BankofAmerica
12%
Citigroup
9%
WellsFargo
9%
Remaining8,095
Institutions
59%
ShareofTotalDeposits
JPMorgan13%
BankofAmerica
13%
Citigroup
10%
WellsFargo9%
Remaining8,095
Institutions
55%
ShareofTotalAssets
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inthatworld,andifweassumethatthereareindeedsomeinstitutionsthatreallyareTBTFwhich
appearstobetherealityfacingustodaythenwemustacknowledgethattheseinstitutionsrepresenta
substantialmoralhazard.
Their
very
systemic
importance
provides
them
with
an
implicit
guarantee
of
solvency
from
their
counterpartiesor,ultimately,thetaxpayerbecausetheirfailureisregardedastoodamagingtothe
systemasawhole.Theeffectofthisimplicitguaranteeofsolvencyistodivorcetheinstitutions
incentivesfromtheprudentriskmanagement.Withnorealthreatoffailure,afirmhasanincentiveto
ratchetupriskinordertoprofitfromtheupsideignoringanyconcernsofthedownside.Nobanking
institutionthathasbeentherecipientofcapitalfromtheUSgovernmentisregardedbythe
marketplaceashavinganythingotherthananimplicitguaranteebytheUSTreasury.Thisguarantee
mayhaverestoredfaithinthesefirmsascounterparties,butithasdonesowithoutreformingthe
balancesheets
or
behavior
of
the
banks
that
generated
the
market
concern
over
their
solvency
and
viabilityinthefirstplace.SeveralrecipientsofTARPhavemoredailyValueatRisk(VAR)inproprietary
tradingtodaythantheydidpriortoNovember2008. Thedangerofthismoralhazardisthatitwilllead
tofurtherrecklessbehaviorandmorelossesinthefuture,thuscreatingfurthermarketchaosand
necessitatingevengreatertaxpayerexpense.InthecurrentenvironmenttheTBTFinstitutionsare
incentivizedtoplayagameofheadsIwin,tailsyoulose.
IfwemustacceptthatthereareinstitutionsthatareTBTFthenthemoralhazardmustbeaddressed
throughregulation.
The
systemically
important
part
of
the
institution
should
be
separated
or
firewalled
fromthepartthatengagesinexcessiverisktaking.Ihavementionedearlierthatnewleverageratios
andstandardsshouldbeappliedtothebankingsystem.Theselimitsshouldbeironclad,universaland
completelytransparent(thatmeansnoSIVsorotheroffbalancesheetvehicles)forinstitutionstouching
theretailconsumer.Thecostofbeingasystemicallyimportantdepositaryinstitutionistohave
profitabilityregulatedandlimitedtobalancethebenefitofanimplicitguarantee.
Fractionallendingoperatesonconfidencethatanyoneinstitutionwillbeabletosatisfyanycreditors
fromday
to
day
even
though
there
is
an
acceptance
that
all
possible
creditors
could
not
be
satisfied
at
anygiventime(theproverbialrunonthebank).Thisgivesdepositaryinstitutionsaspecialrolein
maintainingconfidenceinthefinancialsystem.Ifonefails,itmayhaveacontagioneffectonothers,
whichiswhywehavetheFDICandaninsurancemechanismfordepositstoamelioratethisrisk.This
specialroleonlyenhancesthereasonsfortighterregulationoftheoperationsandbehaviorofthese
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firms.Retailbankinghasessentiallybecomeapublicutility,andshouldberegulatedasonewiththe
limitsaswellastheassociatedguarantees.
Ido,however,believethatthereisaroleforleverageandforaggressiverisktakingintheeconomy,but
that
role
should
be
played
by
firms
that
are
open
and
susceptible
to
the
risk
of
insolvency
and
failure.
Capitalismrequiresfailureandbankruptcyasaconsequenceinordertoguidebehavior.Astheold
adagegoesCapitalismwithoutbankruptcyislikeChristianitywithouthell.Ifwecannotallowafirm
togobankrupt,thenweshouldregulateitsactivitiessothatitcannotengageinthesortofrisky
transactionsthatputitatriskofbankruptcy.Tobeclear,weshouldnotpreventallfirmsfromtakingon
leverageorengaginginriskybehavior;wemustensurethattheyarenotallowedtobecomeTBTF.One
oftheoptionstopreventthisisahardandfastbalancesheetcapthatisnotgamedbyrisk
weighting.AtacertainnominalgrossbalancesheetsizeafirmisdeemedTBTFandsubjecttonew
limitson
risk
taking
and
asset
concentration.
As
afirm
approaches
this
balance
sheet
size,
it
would
be
monitoredbytheappropriateregulatorandwarnedthatcontinuedgrowthwouldpushitintoanew
andtightlycontrolledregulatoryregimethatwouldforceittodivestcertainassetsandunwindcertain
positions.Thealternativeswouldbetostopgrowth,spinoffunitsofthefirmintoseparateandremote
companiesorsellthemtoothermarketparticipants.Thecapcouldbereviewedevery5years(asan
example)andadjustedtothesizeofGDPtoallowthatastheeconomygrowssotoodoestheuppersize
onafirmbeforeitisconsideredTBTF.Theaimofthisregulatoryregimewouldbetoensurethatnonon
depositaryfinancialinstitutioncouldgrowtoasizethatmadethemTBTF.Ibelievethatacombination
ofbalancesheetcaps,monitoringbytheappropriatesystemicriskregulatorandtheintroductionof
regulationsliketheuniformcollateralrequirements(whichwilltendtoreducetheoverallsizeof
derivativepositions)Ihavementionedearlierwouldgoalongwaytoreducingthelikelihoodofnon
depositaryinstitutionsbecomingTBTF.
Thisconcludesmywrittentestimony,inwhichIhaveaddressedwhatIbelievetobetheissuesofcritical
importance. IrecognizethattheCommissionsmandateistoaddressabroaderrangeofissuesoutlined
inSection5(c)(1)oftheFraudEnforcementandRecoveryActof2009. Ihaveopinionsonmostifnotall
ofthosetopicsthatIcanaddressifnecessary. IamhappytotakequestionsfromtheCommissionat
thispoint. Thankyou.
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Appendix
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AppendixB:SupportingDatatoExhibit3
Asof12/31/2007($inthousands) FannieMae FreddieMacAssets:
Cash,fedfundsandsecuritiespurchasedonrepo 53,543,000$ 50,237,000$Loansnetofreserves(thisincludesPCsforFreddie) 403,524,000$ 438,872,000$Securities (includesFNM,FREandotherRMBS) 357,513,000$ 281,685,000$OtherAssets 64,809,000$ 23,574,000$
TotalAssets 879,389,000$ 794,368,000$MBSandothergaurantees(notheldinportfolioabove ) 2,160,497,000$ 1,370,305,000$
TotalAssets+LoanGuarantees 3,039,886,000$ 2,164,673,000$TotalStockholder'sequity 44,011,000$ 26,724,000$TotalEquity/Assets+Guarantees 1.4% 1.2%LeveragetoTotalEquity 69.1x 81.0xCoreCapital(seebelow) 45,373,000$ 37,900,000$CoreCapital/Assets+Guarantees 1.5% 1.8%LeveragetoCoreCapital(seebelow) 67.0x 57.1xStatutoryMinimumCapitalRequirement(seebelow) 31,927,000$ 26,500,000$StatutoryMinimumCapital/Assets+Guarantees 1.1% 1.2%LeveragetoStatutoryMinimumCapital(seebelow) 95.2x 81.7xAllowance% 0.18% 0.31%
*2.50%ofonbalancesheetassets;
*0.45%oftheunpaidprincipalbalanceofoutstandingFannieMaeMBSheldbythirdparties;and
*upto0.45%ofotheroffbalancesheetobligations,whichmaybeadjustedbytheDirectorofFHFA
undercertaincircumstances.
FromFannieMaeandFreddieMacfilings:StatutoryMinimumCapitalRequirement. Theexistingratiobasedminimumcapitalstandardtiesourcapitalrequirements tothesizeofourbookofbusiness.Forpurposesofthestatutoryminimumcapital
requirement, weareincomplianceifourcorecapitalequalsorexceedsourstatutoryminimumcapital
requirement. Corecapitalisdefinedbystatuteasthesumofthestatedvalueofoutstandingcommonstock(commonstocklesstreasurystock),thestatedvalueofoutstandingnoncumulativeperpetual
preferredstock,
paid
in
capital
and
retained
earnings,
as
determined
in
accordance
with
GAAP.
Our
statutoryminimumcapitalrequirementisgenerallyequaltothesumof:
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8/3/2019 Kyle Bass Testimony Before Congress
15/15
15
AppendixC:SupportingDatatoExhibit4
($inThousands) TotalDeposits % TotalAssets %JPMorgan 1,014,186,148$ 11% 1,768,963,935$ 13%
BankofAmerica 1,110,779,388$ 12% 1,714,764,797$ 13%Citigroup 844,295,643$ 9% 1,305,664,786$ 10%
WellsFargo 833,381,202$ 9% 1,206,919,781$ 9%TOP4 3,802,642,381$ 42% 5,996,313,299$ 45%
PNC 189,758,847$ 2% 278,495,745$ 2%USBancorp 234,441,768$ 3% 259,942,982$ 2%
BankofNewYork 141,854,158$ 2% 180,163,546$ 1%Suntrust 125,732,956$ 1% 166,171,009$ 1%
StateStreet 97,247,558$ 1% 160,208,203$ 1%BB&T 113,788,885$ 1% 159,145,841$ 1%
All Other 4,406,533,447$ 48% 6,067,559,375$ 46%Total 9,112,000,000$ 100% 13,268,000,000$ 100%