Why Wall Street crashed in 2008

We now live in a world that is defined by the 2008 Wall Street crash and the resulting world wide economic crash. There were some that saw it coming ahead of time, and managed to make fortunes due to their predictions. They managed to do this due to the creation of the default swap on the subprime mortgage bond in 2004. 

This financial instrument allowed investors to bet against the value of any bond on the exchange— to “short” it. It’s like betting on a team to lose at a football match. 

The people who placed enormous bets on a wide variety of bonds collapsing did so because they thought the debt-fuelled U.S. housing boom was unsustainable.

How Kyle Bass predicted the crash

Kyle Bass was one of those people who made that bet. Bass was the manager of a Texan hedge fund called Hayman Capital, and he had previously been a bond seller for Wall Street firms. 

In late 2006 he took $5 million of his own dollars that he saved from his Wall Street career, raised another $ 500 million from other people, and created this hedge fund. Through this fund, they made a massive wager against the subprime mortgage bond market. 

After warning his old friends, who thought he had gone mad and was crying wolf, he returned home and waited for the market’s inevitable collapse. By the end of 2008, he had been proven right. The subprime mortgage bond market had collapsed, and his previous employer Bear Stearns had gone down with the ship.

However Bass was no longer interested in the world of subprime mortgages. He was now concerned by the economic status of governments. 

After the 2008 crash, the United States government bailed out Wall Street by taking on the subprime loans made by Wall Street banks. This meant that the Federal Reserve was forced to absorb nearly $ 2 trillion dollars of dodgy deals. 

Rather than letting them flounder, governments around the world took on the bad loans made by well rewarded financiers working in the private sector, and the losses were passed onto the national treasuries and the people who help fill them. 

Predicting the Greek government debt crisis

In Kyle Bass’s opinion, the financial crisis wasn’t over. It was simply being smothered by the full faith and credit of rich Western governments. Bass thought that once this faith collapsed, entire countries’ economies would fall. 

Bass believed that from 2002 growth in the stock market was fake, and had been fuelled by people borrowing money they couldn’t afford to repay: by their rough count, worldwide debts, public and private, had more than doubled since 2002, from $84 trillion to $195 trillion. 

Because interest rates were low, the big banks continued to extend this credit and were backed by their government’s central banks (eg. the Bank of England). As the central banks were forced to take on the debt from these bad loans, public debt rose to dangerously high levels and continued to rapidly rise. 

As an example, Ireland had amassed debts of more than twenty-five times its annual tax revenues. Spain and France had debts of more than ten times their annual revenues. But they managed to keep on top of paying off the interest on this debt due to low rates. 

However in countries like Greece, Ireland or Japan, they were walking a fine line. It wouldn’t take much of a rise in interest rates for budgets to be consumed entirely by interest payments on debt. Bass predicted that when the financial markets realized this, investor sentiment would shift, leading governments to default.

At the end of 2008, he thought Greece would probably be the first to go. He was right.

What does Kyle Bass invest in?

If Wall Street and its stocks cannot be relied upon, and government’s themselves aren’t safe; what is a safe investment?

When asked “What do you tell your mother when she asks you where to put her money?” by Michael Lewis, the author of The Big Short, Moneyball and Blindside, Bass simply said “Guns and gold”.

He had been correct about the economic future before both the Wall Street crash and the Greek Government Debt crisis; so it’s safe to assume he is a man who knows a thing or two about money. 

During our current turbulent times and the failure of other supposedly stable forms of investment like Bitcoin collapsing, returning back to gold certainly seems like a good idea. 

Gold is easy to buy and sell, has a track record for returns over the long term, and is valued by investors all over the world. They act as a great way of balancing out the risk that comes with your portfolio of other investments.