Kyle Bass Testimony Before Congress

8/3/2019 Kyle Bass Testimony Before Congress

1/15

1

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


2/15

2

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".


3/15

3

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.


4/15

4

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.


5/15

5

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)$


6/15

6

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:


7/15

7

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.


8/15

8

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:


9/15

9

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


10/15

10

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


11/15

11

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.


12/15

12

Appendix


13/15


14/15

14

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:


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%

Documents

Kyle Bass Testimony Before Congress