Tavakoli - Today's Bank Bailout Risk: Why Didn't We Stop This?

By Janet Tavakoli
Hunffington Post
17 December 2013

Excerpt:
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Kyle Bass, founder of Hayman Capital Management, announced during his March 2013 talk to the Chicago Booth's Global Markets Initiative that he is bearish on Japan and has engaged in trades that will pay off in an extreme scenario:

• I have 27 year-old kids selling me one year jump risk in Japan for less than one basis point. Five billion dollars' worth at a time. - Bass

Mr. Bass said his aggregate position grew to $500 billion, or one-half trillion dollars. He could potentially lose his estimated $50 million investment, but his downside is limited, and his potential upside is enormous. He did not provide details of the trades or provide the formula for calculating his potential payout. Based on his presentation, the tail-risk trades may pay-off if there is sudden and dramatic weakening of the yen or a spike in Japan's interest rates. The trades may not work out for him this year, but Bass observed: "The AIG of the world is back".

Shortly after Bass put on his trade, bank traders asked the hedge fund manager to close out his position. They explained they ran a new model with better stress tests, and the trades were riskier than they first thought. Bass declined, even though he could have made a quick profit. He'd rather harpoon a whale.
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The rest of the article is well worth the read (click here to access full article).