Kyle Bass: The frantic investments of a desperate gambler

bass1
Kyle Bass

Another month, another new low for Kyle Bass, the favorite hedge-funder of Argentine autocrats.

First, a quick recap. Bass, who founded his Dallas-based fund, Hayman Capital Management, in 2006, made his fortune – and international headlines – by correctly predicting the 2008 subprime mortgage crisis. For a while there, he was a superstar. He was M. Night Shayamalan in 2001, coming out of nowhere to get nominated for both his script and direction of The Sixth Sense. Observers jumped to the conclusion that Bass was some kind of genius who could do no wrong.

But time went on.

And time has not been kind to Kyle Bass.

The magic touch – if he ever had it – is long gone. Just as Shayamalan has made bad movie after bad movie, Bass has made bad call after bad call.

And he’s done it in full view of the market-following public. The guy seems never to turn down an invitation to go on TV and pontificate – proffering so-called “analysis” that invariably serves his own bottom line.

bassstrategyIn addition to making bad calls, he’s made unsavory alliances. While pretty much everyone else in the business thinks that the economically illiterate Argentinian despot Cristina Fernández de Kirchner is the worst thing that ever happened to her country’s economy, Bass can’t stop singing the woman’s praises. Last year, her country defaulted on its sovereign debt for the second time in thirteen years an action at once indefensible and irrational. But, as we’ve seen, Bass defended it and rationalized it anyway, sounding so outrageously out of touch with reality that, as the New York Post put it, he sounded more like Argentina’s leftist economy minister Axel Kicillof than a U.S. hedge-fund manager.

christina
Cristina Fernández de Kirchner

If Bass came off like one of the hyper-socialist Kirchner’s lackeys and minions, that should be no surprise – because he is one of her lackeys and minions. The BBC has said he has a good relationship with her. That’s putting it mildly: Bass has consistently championed her preposterously irresponsible economic policies and has delicately ignored the cartoonish degree to which she and her breathtakingly amoral cronies have ripped off their own people.

And he’s gone even further than that: when New York Judge Thomas Griesa ruled that Argentina couldn’t just shell out to creditors who’d agreed to settle for reduced amounts, but also had to pay creditors – including Paul Singer of Elliott Management – who insisted on full payment, Bass took Kirchner’s side, calling Singer & co. immoralfor, as he put it, holding poor countries as hostagesand holding up 42 million people from progress.As we’ve said before, whats really holding up progress in Argentina are Kirchner and her staggeringly incompetent and corrupt flunkies, whose economic illiteracy and limitless avarice have sent poverty levels sky high in a once affluent nation.

The question is: why? Why is Bass such a Buenos Aires bootlicker? Why is his nose a bright salmon pink from rubbing it up against the walls of the Casa Rosada? What kinds of secret, unscrupulous deals does he have – or want to have – with the you-scratch-my-back-I’ll-scratch-yours Kirchner dynasty?

kyle_gmBass’s shady ties with Kirchner and her crew aren’t his only ethical lapse since his fifteen minutes of glory. This is, for example, the guy who, in order to make good on his investment in General Motors, went on TV to try to shift the blame for fatalities caused by non-deploying airbags and faulty power steering in GM cars – problems that the auto giant knew about and failed to act on – onto the dead victims themselves, charging (disgustingly) that they’d either been drunk or failed to wear seatbelts.

Then there’s his business ties to the late Chris (American Sniper) Kyle, whose widow, Taya, is now embroiled in a messy lawsuit with one of Bass’s subordinates at Hayman, whom she’s accused of all kinds of unethical behavior. (Imagine!)

And this is also, note well, the guy who, as we’ve reported, came up a year or so ago with a ploy so vile that both houses of Congress are now working overtime – on a bipartisan basis – to close up the loophole that makes it possible.

bassprofitThe scheme is as simple as it is loathsome: Bass – in collusion with one Erich Spangenberg, known as “the world’s most notorious patent troll” – picks out certain pharmaceutical firms, short-sells their stocks, then challenges one or more of their patents via a front organization, the Coalition for Affordable Drugs, that he set up precisely for this purpose. The inevitable result: the stocks go down, Bass rakes in a few million quick simoleons, and the pharma companies’ prices go up while their motive to fund medical research goes down – thus causing palpable harm to the millions of people who depend on those firms’ products to ameliorate their suffering, relieve their symptoms, or prolong (or even save) their lives.

But why care about the sick and infirm when you’re in a position to turn a buck?

spangenberg2When Bass first got called on this sleazy dodge, he insisted he was doing it for a noble reason: bust patents and competition will drive drug prices down. On close examination, his explanation didn’t really make sense – and it didn’t fool anybody. “There’s nothing in this man’s history,” pointed out James C. Greenwood, a pharma industry leader, “to suggest he has any interest in lowering health-care costs.” Scott McKeown, an intellectual-property expert, dismissed Bass’s claim that he’s actually trying to help patients. Bass, he said, was “simply hoping to spook financial markets to his benefit.” Nobody disagrees.

So transparent was his pretense of altruism, in fact, that Bass has dropped it and switched to another defense. In a response to a filing against him by Celgene, the pharma firm that’s been his biggest target, Bass acknowledged he was motivated by a lust for profit – but quickly added that pharmaceutical companies, too, are driven by financial self-interest. So what, he asked, is the difference?

kyle2010Well, some people do see a difference, and they’re out to stop him. As we’ve noted, a government agency, the Patent Trial and Appeals Board (PTAB), is considering sanctioning Bass for abusing the system with his patent challenges. Also – get this – Celgene has charged Bass and Spangenberg with extortion. Spangenberg, apparently, sent Celgene drafts of patent-challenging petitions, saying, according to Bloomberg News, that “he’d file them unless given cash.” 

kyle2011Some observers might wonder why Bass, who for fifteen minutes there was the Wunderkind of the hedge-fund industry, would be engaged in such grubby hijinks. Why would a guy who’s flown so high and cashed in so handsomely sink so low in order to further line his already well-stuffed pockets? An August 13 article in Barron’s helps clear up that question. We already knew that Bass had lost his fabled magic touch. But it turns out things are even worse than we imagined.

kyle2012Lots worse.

Jim McTague tells the story: “Bass has had a dismal time of it recently….Suddenly, the former luminary can’t seem to get anything right.” While it’s hard “to know exactly how Bass’ funds are doing because he keeps his fund’s actual performance metrics close to the vest,” news reports say he “lost somewhere around 30% in 2014, the mirror opposite of the industry’s best-performing hedge fund managers.”

kyle2013 Thirty percent! No further questions, Your Honor.

McTague quotes a recent article in which Bass himself admitted to having had a tough year.” “It’s nice to win all of the time,Bass said. When you are not winning and everyone else is, it makes life difficult.

No wonder he’s pulling this chintzy pharma con and sucking up to Cristina Fernández de Kirchner, that despotic queen of the pampas!

kyle2014According to McTague, Bass’s two current preoccupations are oil (everyone else to the contrary, he’s counting on prices to rise within a year) and Argentina (where, in McTague’s words, Bass continues to be “bullish where others are heading for the exits”).

Bass, reports McTague, refuses to talk about his and Spangenberg’s tacky patent ruse. Meanwhile, the latest news from Capitol Hill is that bills triggered by Bass’s activities have easily cleared both the House and Senate Judiciary Committees, with legislators hoping that by the end of this month a law will be on the books that “cut[s] the legs from under this particular Bass strategy.”

bass2aOnce that happens, what’s on deck for Bass? What squalid swamp will he wade into next? What sordid small-time con will he cook up? We don’t hold his stock-picking powers in particularly high regard – not anymore, at least – but we’re bubbling over with confidence that this shameless bottom-feeder has a cornucopia of uniquely unethical make-a-buck stratagems left in him.

And, of course, if all else fails, he’ll always have Buenos Aires.

UPDATE, August 27: Only hours after this post went up, the Patent Trial and Appeal Board denied Bass’s first two patent challenges. The PTAB’s decision “sets a worrying precedent for Bass,” wrote Business Insider, which also noted this very illuminating response by Bass: “It should be axiomatic that people do not undertake socially valuable activity for free.” In Bass’s world, it’s all about the money. 

Meet Georges Ugeux, Wall Street’s fan of tyrants

ugeux2
Georges Ugeux

At one time he was the NYSE’s senior managing director for international relations – “the face of the New York Stock Exchange outside of the United States.” But he left the Big Board, along with a couple of other higher-ups, in the wake of a controversy over compensation packages. Today, after decades at places like Morgan Stanley and Kidder Peabody, the Belgian-American investment banker Georges Ugeux runs his own store, Galileo Global Advisors, in New York.

He also contributes regularly to both Le Monde and The Huffington Post – and the first thing that needs to be said about his contributions to the latter organ (his Le Monde pieces are presumably run past an editor before they see print) is that the prose is downright execrable. It’s riddled with grammatical errors and, even when he’s apparently making a simple point, can be hard to make total sense out of.

Take a March 2014 HuffPo piece about the dust-up in Ukraine. “Does the Parliament votes [sic] to join Russia?” he wrote. “It is illegal. Will Crimea, who [sic] disposes [disposes?] of a special status, vote whether they [sic] want to be reunited with Russia or not?” There’s more: “For all its weaknesses,” he writes, “Europe has to live with borders with Russia and Ukraine. It has to resolve its neighborhoods [sic] problems. There is no need, however, for them to supersede what the Crimea’s people will decide.”

Look at those last two sentences. Presumably both “it” and “them” are meant to refer back to “Europe.” Okay. But “supersede”? What does it mean to say that Europe doesn’t need “to supersede what the Crimea’s people will decide”? None of the accepted meanings of “supersede” makes sense here. You can kind of guess what Georges Ugeux is driving at, but this isn’t a paper for a remedial high-school English class – it’s an opinion on international events delivered by a world-class thinker, a guy with a stellar CV, someone we’re supposed to take seriously as an authoritative voice on these matters. This being the case, wouldn’t you think a dude at this level would give his own prose a careful read-through before sharing it with the world? Or hire somebody competent to do so?

ugeux

To be sure, the thrust of his March 2014 piece was clear enough. In the conflict between Putin and Ukraine, Georges Ugeux stands with Putin. No, really. He also sympathizes, as he put it, with “the people of Crimea who do not want to remain under the fascists who dominate Ukraine and prohibit them from speaking Russian.” As if all that weren’t enough, he took the opportunity to smear Russia’s anti-Putin opposition as being “under the influence of extreme right and neo-Nazi groups” and to describe Putin as having been “legitimately elected.”

All of which raises the question: is a guy with this kind of political acumen and moral judgment – to say nothing of his slovenly prose – somebody you’d ever want to trust with your money?

Another example. In September 2013, Georges Ugeux weighed in on Obamacare:

The Republicans do not seem to understand that when Congress votes [sic] a law, it is the law of the land. It is sacred in a number of ways that they like. When they don’t like it, they ignore their obligations.

Yes, tea party blackmailers, the Affordable Health Act is the law. By using budget or debt ceiling to trap the credit of the United States of America, you are being in-civic.

Some writers manage – every now and then, anyway – to hit on le mot juste; Georges Ugeux repeatedly misses it by a mile. “Trap the credit”? (And this is a financial expert?) “In-civic”? And of course the law is called the Affordable Care Act, not the Affordable Health Act. He goes on:

You are guilty of not respecting the United States institutions, and the value of your own votes. This creates in turn a total discredit of congressional votes and the institution of Congress in the eyes of our citizens and the world.

Time and again, reading Georges Ugeux’s prose, you get the impression that it’s gone through at least two incompetent translations, from language A to language B to language C, before it ended up in English – or a rough approximation thereof. Think this is unimportant? Think again. Clear, coherent prose reflects clear, coherent thinking. Prose like his is the mirror of a more than moderately muddled mind.

ugeux3
Georges Ugeux (center) with fellow investment bankers Yves-André Istel and Jean-François Serval

Which brings us to his financial commentaries. Georges Ugeux has written about a number of topics related to international finance, but of late he’s made a specialty of slamming the so-called “vulture funds” and the U.S. courts that have ruled in their favor in the matter of Argentina’s sovereign debt. “Are Sovereign Ratings a Legacy of Colonialism?” asked the headline of one piece he published in 2011. In another article, deploring the judiciary’s support for the “vulture funds,” he actually compared the U.S. Supreme Court to Pontius Pilate. But he reserves his real venom for Paul Singer of Elliott Management, whom he accuses of having brought grief to the Argentinian people by insisting that their government pay Elliott the entire amount owed to it.

Georges Ugeux, you see, is deeply concerned about the Argentinian people. Yet instead of getting exercised about the wholesale corruption committed by the regimes of the late President Néstor Kirchner and his wife and successor, Cristina Férnandez de Kirchner, as well as by their shameless (and, it sometimes seems, countless) cronies – who have ripped off billions upon billions of dollars from that once-prosperous country’s hapless citizens – Georges Ugeux places the blame for Argentina’s suffering squarely on the shoulders of Singer, whose activities he condemns as “the capitalist system at its worst.” Not only is he quick to join the vile Cristina Kirchner in using the term “vulture funds”; he also calls Singer & co. “scavengers” and accuses them of “heinous behavior” – all this for the supreme offense of purchasing debt fair and square and expecting to have it paid back in full.

Kyle Bass: the best friend an Argentine autocrat could have

bass2
Kyle Bass

Michael Lewis, the financial writer, has said that when he first met Kyle Bass, “I had an experience I’ve often had while listening to people who seem perfectly certain about uncertain events….One part of me was swept away by his argument….The other part suspected he might be nuts.”

Lewis isn’t the only financial insider who’s had a mixed reaction to Kyle Bass. The Dallas hedge-fund manager has, it must be acknowledged, won his share of praise. Once upon a time, indeed, he was considered something of an instant legend. Only two years after launching his own hedge fund in 2006, he struck it rich as a result of having predicted the subprime mortgage crisis.

For fifteen minutes, he was the hottest guy in the game.

Since then, however, things haven’t gone very smoothly for Kyle Bass. Far from it. In recent years – not to put too fine a point on it – his fund, Hayman Capital Management, has often performed disastrously. It’s had its ups, but some of its downs have been headline-making. In April 2012 alone, it lost 29% of its value. During the first quarter of 2014, it dropped by over 6%.

Time and again, Kyle Bass’s confident forecasts have proven wrong – often catastrophically so. Most famously, he’s been saying for years that the Japanese economy is an immense Ponzi scheme and that any minute now the market will catch on – leading inevitably to a debt crisis that sends bond yields sky-high and makes the yen all but worthless. In July 2013, he warned that this implosion would come within about two years – and would rock international markets so dramatically as to force the Western world to reconstruct its economic order from the ground up.

His doom-and-gloom prophecies for Japan, however, have yet to be fulfilled. And as time has gone by, more and more observers have clobbered his analysis. In May 2012, Joe Weisenthal of Business Insider called Bass’s take on Japan “totally simplistic and incorrect.” Noting that Bass bases his forecast largely on Japan’s debt-to-GDP ratio, Weisenthal pointed out that debt-to-GDP “is a lousy measure of anything” because it “just doesn’t tell you anything about interest rate risk or credit risk.”

bass5After all, argued Weisenthal, foreigners hold plenty of U.S. debt, but this hasn’t sent the American economy into a tailspin; by contrast, Italy’s public debt is mostly held domestically, yet that country is headed down the tubes. Yes, Weisenthal acknowledges, “there are a lot of yen floating around the world,” but ultimately “that currency will find its way home.” This, in Weisenthal’s view, is what Kyle Bass doesn’t get:

For a country that borrows in its own currency, government spending finances borrowing! If Japan spends 100 billion yen on something, that’s 100 billion yen out there in the world that will eventually wind up in a financial institution, where ultimately 100 billion yen worth of JGB will be purchased.

Weisenthal also made this observation:

True sovereign bustups are not the result of accounting or numbers, but the result of some kind of social/political dysfunction. Japan is arguably the most stable society in the world, with low unemployment and a functioning economic and political culture. Thanks to the country’s population dynamics, Japan isn’t a growth dynamo, but there aren’t even the vaguest hints of instability. It’s not the kind of place where you’d see a meltdown.

Another expert who’s disputed Kyle Bass’s Japan scenario is Jesper Koll, head of Japanese equity research at J.P. Morgan Securities Japan. In Koll’s view, as paraphrased by Stephen Harner of Forbes, “Kyle Bass has not fully thought through some of his points, or has ignored contrary indications.” Yes, wrote Harner, the economic policies of Prime Minister Shinzō – who set a 2% inflation target and decreed a “Keynesian deficit spending stimulus” – might raise interest rates, but “there will be no crisis, and there may not be higher rates.”

bass3Koll’s view, in short, is that Japanese government bonds “remain an attractive asset.” Koll made a number of cogent points – among them, that deregulation in several sectors of the Japanese economy could send productivity soaring and significantly boost the country’s economic health.

Curiously, while sounding a death knell for Japan, Kyle Bass has been bullish on – of all countries – Argentina. In September 2014, the BBC reported that unlike Moody’s and other ratings agencies, which were “very critical” of the regime of Cristina Fernández de Kirchner, “Kyle Bass believes that the current economic policy of the Argentinian government is the correct one.”

So gung-ho, in fact, has he been on investment in Argentina – which, it will be recalled, defaulted on its debt last year for the second time in thirteen years – that The New York Post commented on August 28, 2014, that Kyle Bass, addressing this subject on the previous day, had “sounded more like Argentina’s leftist economy minister Axel Kicillof than a U.S. hedge-fund manager.”

Was the Post on to something? Throughout Argentina’s debt crisis, Kyle Bass did come off not like a responsible financial manager but like a paid spokesman for the Casa Rosada (Argentina’s White House). As the BBC noted, Hayman Capital has a “good relationship” with Fernández – a leader who, like her late husband and predecessor, Néstor Kirchner, is notorious for her destructively socialist economic policies and her government’s staggering levels of corruption. The ruling by a New York judge that Argentina couldn’t dodge its debt to holdout creditor Paul Singer of Elliott Management was legally solid, but Kyle Bass wasn’t having any of it: Singer, he charged inappropriately, was “holding poor countries as hostages.”

Then there is his perplexing enthusiasm for General Motors. It’s been his biggest position for some time, although he admitted himself that a massive GM recall made 2014 “a tough year” for his firm. Still, he insisted that GM’s management was “doing a great job” and that the company was “much leaner” than in the 1990s. “By every metric” except the recall issue, Kyle Bass claimed, GM is “doing great.”

In February 2015, all his major moves having failed him, Kyle Bass tried a new tack: selling pharmaceutical companies short and then exploiting a relatively new process, “inter partes review,” to challenge their patents. First he went after Acorda Therapeutics, whose major product is Ampyra, a treatment for multiple sclerosis, and whose stock fell nearly ten percent as a result of his challenge. It remains to be seen how this new move will pan out.

bass1Meanwhile, Kyle Bass finds himself entangled in what may be America’s least enviable legal battle. A few years back, he went into business with the late Chris Kyle, subject of the recent film American Sniper and now a posthumous national hero; the enterprise has since gone bankrupt, and Chris Kyle’s widow, Taya, has sued a Hayman Capital attorney, making a host of serious charges, among them that he pressured her husband to surrender the rights to his firm’s now-iconic logo and that (in violation of Texas law) the lawyer never made clear that his ultimate loyalty was to Hayman and not Kyle. Also at issue are a loan on the Kyle family home and the profits from his bestselling memoir. However you cut it, it’s a shabby situation for a hedge-fund superstar to find himself in.

Briefly put, Kyle Bass’s star has slipped considerably since he made his name – and his fortune – on the subprime mortgage crisis. It seems fair to say that what looked for a while there like a Midas touch has turned out to be something more like a case of first-time gambler’s luck giving way to the usual Vegas pattern of loss after loss after loss.

Sure, he could still turn things around. Who knows? Stranger things have happened. But given his recent record, we wouldn’t bet on it.