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The full subprime letter from Hayman’s Kyle Bass

Hayman Capital 2626 Cole Avenue, Suite 200
Dallas, TX 75204
July 30th, 2007

Dear Investors,
Over the past few months, we have seen the exacerbation of the Subprime problem accelerate at a precipitous pace. Wait a minute…I thought the Subprime problem was neatly contained in a nice little box of risk that the Fed had put it in? After many meetings and conversations with the various leaders of brokerage firms and asset managers, I don’t think the Subprime problem is as contained as many would like for you to believe. To understand the massive ripple effects of the Subprime problem, you have to look deeply into who owns the eventual risk and furthermore, how it will affect their behavior going forward.

The Greatest “Bait and Switch” of ALL TIME
I recently spent some time with a senior executive in the structured product marketing group (Collateralized Debt Obligations, Collateralized Loan Obligations, Etc.) of one of the largest brokerage firms in the world. I was in Roses, Spain attending a wedding for a good friend of mine who thought it would be an appropriate time to put the two of us together (given our shared interests in the structured credit markets). This individual proceeded to tell me how and why the Subprime Mezzanine CDO business existed. Subprime Mezzanine CDOs are 10-20X levered vehicles that contain only the BBB and BBB- tranches of Subprime debt. He told me that the “real money” (US insurance companies, pension funds, etc) accounts had stopped purchasing mezzanine tranches of US Subprime debt in late 2003 and that they needed a mechanism that could enable them to “mark up” these loans, package them opaquely, and EXPORT THE NEWLY PACKAGED RISK TO UNWITTING BUYERS IN ASIA AND CENTRAL EUROPE!!!! He told me with a straight face that these CDOs were the only way to get rid of the riskiest tranches of Subprime debt. Interestingly enough, these buyers (mainland Chinese Banks, the Chinese Government, Taiwanese banks, Korean banks, German banks, French banks, UK banks) possess the “excess” pools of liquidity around the globe. These pools are basically derived from two sources: 1) massive trade surpluses with the US in USD, 2) petrodollar recyclers. These two pools of excess capital are US dollar denominated and have had a virtually insatiable demand for US dollar denominated debt…until now. They have had orders on the various desks of Wall St. to buy any US debt rated “AAA” by the rating agencies in the US. How do BBB and BBB-tranches become AAA? Through the alchemy of Mezzanine-CDOs. With the help of the ratings agencies the Mezzanine CDO managers collect a series of BBB and BBB- tranches and repackage them with a cascading cash waterfall so that the top tiers are paid out first on all the tranches – thus allowing them to be rated AAA. Well, when you lever ONLY mezzanine tranches of Subprime RMBS 10-20X, POOF…you magically have 80% of the structure rated “AAA” by the ratings agencies, despite the underlying collateral being a collection of BBB and BBB- rated assets… This will go down as one of the biggest financial illusions the world has EVER seen. These institutions have these investments marked at PAR or 100 cents on the dollar for the most part. Now that the underlying collateral has begun to be downgraded, it is only a matter of time (weeks, days, or maybe just hours) before the ratings agencies (or what is left of them) downgrade the actual tranches of these various CDO structures. When they are downgraded, these foreign buyers will most likely have to sell them due to the fact that they are only permitted to own “super-senior” risk in the US. I predict that these tranches of mezzanine CDOs will fetch bids of around 10 cents on the dollar. The ensuing HORROR SHOW will be worth the price of admission and some popcorn. Consequently, when I hear people like Kudlow on CNBC tell their viewers that the Subprime problem is “contained”, I can hardly bear to watch.

The Moral Hazard of HOT Potatoes
The key reason the Subprime problem exists as it does today has to do with the wanton disassociation of risk inherent in the machine that churns out Subprime loans. Unlike the S&L crisis of the 1980s, the mortgage lenders of today aren’t taking their own balance sheet risk when underwriting loans. These brokers get paid for quantity REGARDLESS of quality. The balance sheet risk is transferred through three entities in less than 90 days from origination. The originator will originate ANYTHING he can sell to a whole loan buyer to pass the hot potato on. Whole loan buyers are simply the aggregators of loans at the Wall St. firms that aggregate, package, tranche, and sell as quickly as they possibly can to the clueless buyer. This transference of risk is the crux of the Subprime situation. Just think about it…if you were a 20-something making mortgage loans in California using someone else’s balance sheet and being paid per loan (with no lookback to performance of the loan), how many dubious loans would you underwrite?

Buyers are now BEWARE
During and after the rout these investors are about to shoulder, how excited do you think they are going to be to purchase the next “AAA” rated piece of structured finance paper?!!?!?!? These same investors and global pools of liquidity have been funding the Leveraged Buyout (LBO) boom by purchasing the debt that funds the Collateralized Loan Obligations (CLOs) which in turn, buy 60%+ of the LBO debt used to finance these transactions. I also recently spent some time with one of the largest CLO issuers in the world. They had just returned from Japan where they were marketing a new CLO in order to be one of the buyers for new LBO debt. Needless to say, their marketing efforts fell on deaf ears. They were told by the Japanese investors that they have lost confidence in the ratings agencies (you think?) and that in an election year there is too much uncertainty. They basically said, “No more.” If there is not a CLO bid from Asian and Central European banks, where do you think the $290 billion in announced LBOs will go to sell their debt? I actually have no idea how to answer that question myself. We have seen the bank-loan index drop from 100.5 to 90.5 in 5 short weeks, and a widening in investment grade as well as non investment grade credit. In the immediate absence of liquidity, there will be many casualties of levered funds and firms. There will be a “re-pricing” of risk on a global scale that will mean more credit funds being carried out the door feet first.

Latest Casualties
Just today, the latest firm to suffer the wrath of too much leverage and mis-priced risk was Sowood Capital. What is truly remarkable about this particular situation is the fact that Jeff Larson, the former manager of the $30 billion Harvard Endowment, is the principal Manager at this firm. Sowood was renowned as being a “best-in-class” fund. If the former manager of the Harvard endowment managed to lose 57% of his fund (more than $1.7 billion in losses) in just 30 days, how are the “other” credit funds out there doing? How are they calculating Value-at-Risk? This afternoon, brokerage firms were sending collateral calls to other funds positioned similarly to Sowood. They joined the ranks of the two Bear Stearns funds managed by Cioffi, Australia’s Basis Capital, Absolute Capital, and Macquarie Fortress Funds as well investments by Korea’s Woori Bank, and London’s Caliber Fund by liquidating and eventually returning what is left to investors. Not to mention the downfall of the poster child of the levered “positive carry” industry, United Capital Market’s Horizon Fund – managed by John Devaney, owner of the aptly titled 142ft yacht, the Postive Carry (which is incidentally now for sale, all enquiries can be directed to http://www.iyc.com/featured_yachts.cfm?mn=1).

I have recently discovered the insightful writings of someone with whom I have not had the pleasure to speak or meet in person. Howard Marks is the Chairman of Oaktree Capital Management and he recently sent a letter to his clients entitled, “It’s All Good”. Mr. Marks had a most astute observation with regard to the recent investing environment:

“…investors’ recurring acceptance that it’s different this time – or that cycles are no more – is exemplary of a willing suspension of disbelief that springs from glee over how well things are going (on the part of people who’re in the market) or rationalization of the reasons to throw off caution and get on board (from those who have been watching from the sidelines as prices moved higher and others made money). In this way, the bullish swing of the investment cycle tends to cause skepticism and risk tolerance to evaporate. Faith, credence and open-mindedness all tend to move up – at just the time skepticism, discrimination and circumspection become the qualities that are most needed.”
Credit Markets and Where we are today in SubprimeLast week, I spent some time in the “Inland Empire” of California on a diligence trip to survey the actual damage. As many of you already know, 55% of all Subprime loans were made in California and Florida. The inland empire of California can be described as the central valley that extends from the southern part of the state all the way to the northern part of the state at least 1-hour inland from the coast. Let me start by saying it is MUCH WORSE than even I thought it could be. I met with various mortgage lenders, originators, economists, and capital markets professionals. The overriding theme that I got from them was that “Everyone committed fraud and everyone is responsible for the problem”. They told me that they believe that 90% of all Subprime loans that were made contained some kind of fraud. Either borrowers lied about their incomes or mortgage brokers fudged numbers on the applications to make them pass muster with the needed ratios in order to get loans approved. They also said that of the borrower frauds, 50% of applicants overstated their income by MORE THAN 50%!!! As Kindleberger put so well in his book, Manias, Panics, and Crashes:
The implosion of an asset price bubble always leads to the discovery of frauds and swindles. The supply of corruption increases in a pro-cyclical way much like the supply of credit. Soon after a recession appears likely the loans to firms that were fueling their growth with credit declines as the lenders become more cautious about the indebtedness of individual borrowers and their total credit exposure. In the absence of more credit, the fraud sprouts from the woodwork like mushrooms in a soggy forest.
In California today, home prices are down between 25%-40% in the central valley. From San Bernadino to Stockton, home prices are in free-fall and their physical condition is actually worse than their price decline. The borrowers are locked out of the financing market and there is no logical buyer for these homes outside of the original borrower. The foreclosure wave will hit these neighborhoods like the Asian Tsunami. If you plug in 15% depreciation in housing prices and 50% loss severities into our Subprime model, the capital structure is wiped out all the way to the “AA” tranches.In the Subprime Credit Strategies Funds, we continue to hold our initial positions and have not taken any profits yet. In Hayman, we are short credit in the US (both Subprime RMBS and corporate credit) and long non-US equities and debt. We are short US consumer based equities, preferreds, and debt. I think the world is going to begin to
decouple from the US and realize that currency appreciation coupled with the globe’s best growth is an attractive alternative to fraudulent ratings, US dollar depreciation, and financial inventions used to export risk.Sincerely,
J. Kyle Bass
Managing Partner

This entry was posted by Paul Murphy on Tuesday, August 21st, 2007 at 13:02 and is filed under Uncategorised. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.

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  1. Aug 25   11:11 Posted by Pink Elephant [report]

    On more thing… The current reported delinquency rates of ~2% I looked up when researching my first post (which was about “all things mortgage related Anxiety Disorders”) was not it turns out relevant to the subprime mortgage subset taken in isolation. I’ve been doing a bit more browsing on the topic of subprime delinquency rates and noticed something that might interest Alphavillers…

    Firstly I thought it would be fun to benchmark the doomsayers against their own past predictions and found this interesting and apparently well informed blog from January, http://wallstreetexaminer.com/blogs/winter/?p=301 , which sums up fears for the 2004 and 2005 vintages…

    Then I found an IMF report, http://www.imf.org/External/Pubs/FT/SCR/2007/cr07264.pdf , from early this month on the whole US economy of which page 8 is relevant.

    The graph on page 8 of the IMF report shows 2005 vintage delinquencies peaking early and falling back (c.f. 2001 delinquencies on the same chart)… I believe this is BECAUSE “no docs subprimes” have a different half-life* to regular subprimes. The strange shape of the 2004 subprime delinquency curve fits this theory like a glove**. What does this imply for the 2006 vintage?

    THE IMPLICATION IS THAT 2006 VINTAGE SUBPRIMES WILL LIKELY PEAK VERY SOON (WITHIN 6 MONTHS***) AT BELOW 11%… i.e. Things aren’t going to be nearly as bad as some people think and the doomsayers will be “surprised” (assuming they didn’t talk the market down on purpose) by how quickly things improve - Don’t panic!!!! ;o)

    *different half-life => different delinquency behaviour - It seems obvious to me that “no docs subprimes” will go belly up much sooner than traditional subprimes on average. The IMF graph shows this…

    **If we agree with the aforementioned blogger that 2004 was back-loaded with “no docs subprimes” then the late breaking sharpe peak superimposed on the regular pattern is easy to explain. Notice how the blogger (writing six months ago) got it completely wrong about the 2004 vintage (and also the 2005 vintage) both of which have improved from their elevated delinquency levels quickly.

    ***Quicker delinquency for “no docs subprimes” not only implies a sharper peak but also NEAR BY peak!

  2. Aug 23   18:06 Posted by EasyHUD - Foreclosure Resources for Everybody» Blog Archive » Foreclosures up 60% in Hawaii ... and other foreclosure news! [report]

    […] Subprime letter from Hayman’s Kyle Bass (ftalphaville.ft.com) […]

  3. Aug 23   17:30 Posted by gregory [report]

    i would say making a quick buck went before reputation this time

  4. Aug 23   16:04 Posted by Pink Elephant [report]

    Oops - It is also true that just because something gets securitised it DOES NOT become safer in and of itself.

  5. Aug 23   16:01 Posted by Pink Elephant [report]

    Gregory - Well I think we have reached a concensus… The truth is panic attacks can have real consequences and that is not something I would dismiss lightly. It is also true that just because something gets securitised it become safer in and of itself. Lax lending standards have consequences and should have… The inputs into structured finance pricing must be adjusted if underlying standards have dropped and this drop may have gone unobserved (to me NINJA subprime lending being touted as regular subprime is a kind of fraud) - However I am inclined to believe that only a tiny minority of notionally AAA structured products have been mis-rated BECAUSE ratings agencies rely on their reputations too much to risk them for a fast buck… On which point there are a lot of IF’s and not enough BECAUSE’s in your last post for my liking - Let’s just wait and see IF the US economy can live with tighter credit conditions or IF we are all doomed - Don’t panic!!!! ;o)

  6. Aug 23   15:22 Posted by gregory [report]

    PinK Elephant:

    I agree that we should not argue too much semantics here. Nevertheless, I would say a big diffrecence between the tranched ABS refered to in the presentation is that it’s assets consist of raw subprime mortgages. I would say a CDO would rather be made up of ‘distilled material’, like ABS securities(this off course is different in the case of CLO’s, but then again that is because of the size of Leveraged loans)

    My point is that a squared CDO situation would be slightly different(and even more of a black box) as it’s assets would consist of CDO securities, which in turn belong to CDO’s that are repackaging ABS securities. It would look a little bit like this:

    Squared CDO > CDO> ABS> pool of mortgages

    So in the case of a squared CDO there would be an extra layer of leverage.

    Besides this, I think the point of both the letter and the presentation is that once the market is scared out of structured credit in general, it is going to be very difficult to put together and sell additional CDO’s, which in turn will put a end to cheap and easy credit, both a the level of the consumer/homeowner and at the level of the corporation(:read private equity sponsor)

    This end of easy credit might have far reaching consequences:

    It might make it very difficult to refinance on better terms, and

    It might also set in a stagnation of asset prices in all area’s where asset prices where mostly fueled by cheap credit.

    Such a situation of stagnating collateral values and expensive credit will probably result in defaults for the most vulnarable debtors, which might in turn set in a vicious circle of falling collateral values as collateral is sold to meet obligations to creditors, resulting in even more defaults spreading to less vulnerable classes of debtor. This all will become even worse due to the general economic slowdown it might generate.

    And the real problem for financial markets will come once the above will start showing up in the assets of existing CDO’s. Remember that we haven’t heard yet of some big CDO blowing up, all the way to the senior tranches. Wat we are witnessing at the moment is some players blowing up because they are highly dependent on short term funding(like SIV’s, conduit’s) which has become scarce or because the market value of their structured finance portofolio has deteriorated(like hedge funds that face huge amount of redemptions or margin calls because they just announced that their credit trades went wrong)

    This has mostly left unaffected players that are holding on to their structured credit securities and that do not care about the market value of those as they are not trading but rather holding them till maturity.

    In other words, CDO’s are not blowing up yet, it is only the market value of their securities(their tranches, not their assets off course) that is falling.

    But the problem is that now that nobody will buy any additional structured credit securities, this will probably result in deteriorations within the protofolio of current CDO in the next year or so. So my guess, the real troubles are only starting, and the question is what will happen to financial markets in general once CDO’s start blowing up and even the senior tranches are affected?

    Think of all the institutions that cannot exit their structured credit position as there is no secondary market liquidity. they are for now holding on to their position, which is probably so far so good unless they hold junior securities of mortgage related paper. But if the assets of the CDO start to deteriorate heavily, and it results in losses on the whole capital structure, there is not much they can do.

  7. Aug 23   14:09 Posted by Pink Elephant [report]

    Thanks very much Gregory. I enjoyed reading the link you suggested and recommend it to others…

    By the way I tend to classify anything that tranches credit risk (even if MBS/ABS is the underlying) in the category CDO so I stand by my statement that it is effectively a CDO^2 that Mr Bass was talking about… But I’m sure we’ll all be happy to park the question of whether a classic CDO is a type of ABS (where the asset is loan or bond debt) or whether tranched ABS is a type of CDO - Semantics isn’t the issue here…

    The key slides in the presentation you’ve linked us to are (for me)
    a) Slide 12 which shows a structure just like the one Mr Bass says exists. It claims Deutsche bank as a source although without naming a specific paper or issue so I still think the jury should stay out - To my mind you could immediately fix up the problem Mr Bass claims is infecting the world of finance just by mixing in other non-mortgage related assets or bonds into the collateral pool of the CDO on the right of slide 12 i.e. not JUST subprime CDO/ABS tranches… I still suspect that most structures are actually hybrid as it seems a cheap and obvious way to get a better rating and is bound to be much safer for everyone.
    b) Slide 13 - It is quite correct to assert that correlations can change but I think this slide rather overstates the case - Unlike secondary market assets which become correlated 100% at times of trader distress (with the forced selling by traders themselves becoming the correlating agent) home owning people are not bought and sold by traders and are not clones… Even at the height of the great depression “only” 25% of people lost their jobs but if slide 13 was right 100% of people would have and we are not talking about a great depression since there isn’t even a recession yet… People are not 100% correlated… Having said that “red flagging” the ratings agencies on this makes sense to me. How far back have the agencies checked correlations? Perhaps the author of slide 13 should check the data implicit in slide 7 - How far back have THEY checked correlations??
    c) Slide 35… Taken at face value this completely negates Mr Bass’s claim that “Well, when you lever ONLY mezzanine tranches of Subprime RMBS 10-20X, POOF…you magically have 80% of the structure rated “AAA” by the ratings agencies, despite the underlying collateral being a collection of BBB and BBB- rated assets…” - It seems there is no “ONLY” about it when you add Bond guarantors/insurers into the picture…

    Still it’s a very interesting piece to draw my attention to - Thanks Gregory

    Who ever is left “holding the bag” let us not forget (at the risk of repeating myself) that nothing in the presentation changes the core fact that the leverage of some CDO tranches is always accompanied by de-leverage (and better ratings) in other tranches… The CDO merely refines and concentrates what is already there just as you can make gasoline from crude oil… I think we should all be careful not to stop driving just because “horror of horrors” what’s left over after we make gasoline e.g. tar (c.f. equity tranche) isn’t fit to put in the car (c.f. isn’t investment grade because it is leveraged) - That is a truly irrelevant observation as is the comment on slide 14 of the presentation… Which brings me back to staying rational folks!

  8. Aug 23   11:54 Posted by gregory [report]

    Pink Elephant, he’s not talking about CDO squared but about CDO’s whose assets are mostly BBB tranches of subprime ABS

    you should check out this on the massive ripple effect(it also explains the CDO structure he’s talking about btw) :
    http://www.designs.valueinvestorinsight.com/bonus/pdf/IraSohnFinal.pdf

    But off course you can be rational about this as well and say it’s just another guy working hard to make sure his short position works out.

  9. Aug 22   15:01 Posted by anon [report]

    Pink Elephant — chill man

  10. Aug 22   14:47 Posted by Pink Elephant [report]

    By the way for the uninitiated anxiety ridden among you PLEASE LET ME PUT YOUR MIND AT REST and make one thing clear that I think you should know -

    ****All CDOs do is repackage existing debt****

    ****REPEAT - All CDOs do is repackage existing debt****

    That means:

    a) THEY DO NOT INCREASE EXPOSURE IN ANY WAY AT ALL!! The “leverage” of some CDO tranches (of which Mr Bass speaks so casually) is ALWAYS accompanied by “de-leverage” (and better ratings) in other tranches… So it’s not magic it’s common sense

    b) The total losses due to subprime delinquencies have therefore not been magnified by these structures and a pea sized problem will always stay pea sized - it certainly NEVER should lead to real “massive ripple effects” - Other than the waves of irrational anxiety we’ve seen that is (see my original post on ADs)

  11. Aug 22   14:29 Posted by Pink Elephant [report]

    Actually on the subject of embarassment I’m begining to think on re-reading what Mr Bass said a bit more carefully that he wasn’t being totally illogical although I still think he must be wrong:-
    1) He was actually talking about CDOs made of other CDOs, in fact repackaged BBB and BBB- tranches of subprime CDOs - In which case he should have called them CDO squared for clarity… and to avoid confusion and panic in the less knowledgeable.
    2) CDO squared did appear for the first time around 2003 which fits what Mr Bass said but I had no idea that people were making brand new ones as recently as 2006 with undiversified collateral types. Frankly I doubt they could have ever got AAA ratings in the manner Mr Bass claims.
    3) His point is that “Well, when you lever ONLY mezzanine tranches of Subprime RMBS 10-20X, POOF…you magically have 80% of the structure rated “AAA” by the ratings agencies, despite the underlying collateral being a collection of BBB and BBB- rated assets…” but I bet you the actual structures he’s talking about mixed subprime RMBS based CDO tranches with other unrealted BBB and BBB- rated assets… If so then he is still the scaremonger I was suggesting in my post below (which relates to CDO’s not CDO squared)

    I think Mr Bass should point his investors to an actual example of one of his (I suggest mythical) CDO squared based only on mezzanine tranches of subprime RMBS CDO as proof that he is playing fair in his comments. By the way if you could get me a photo of Big Foot riding a Unicorn at the same time then I’d like one to put into my scrapbook next to your letter Mr Bass…

  12. Aug 22   12:31 Posted by Pink Elephant [report]

    HELLO, Err hello… Sorry to be rational guys BUT… “If you plug in 15% depreciation in housing prices and 50% loss severities into our Subprime model, the capital structure is wiped out all the way to the “AA” tranches” => No losses on “AAA” tranche - Right… Which means that even Mr Bass must admit that when “saying it is MUCH WORSE than even I thought it could be…” he is still saying all the Asians and Europeans he’s talking about will be fine and not hurt in any way EVEN IN THEIR SUBPRIME HOLDINGS let alone anything else - They should not therefore loose faith in ratings and should not head for the exits as he implies - Assuming they are rational that is - Excuse me but… “80% of the structure rated “AAA” by the ratings agencies” because 20% or roughly 1 in 5 people would have to default for the structure to be hit - Right? I just checked the current reported delinquency rates and they are simply nothing like these level (more like 2%) and surely NEVER will be… perhaps you can go check what percentage of families lost their homes in the great depression of the 1930s Mr Bass as a benchmark. Perhaps you would recommend investing in military supplier stocks as a hedge??? Feeling embarassed yet?

    And yet in somethings you are not wrong “the key reason the Subprime problem exists as it does today” is indeed to do with “the wanton disassociation of risk inherent in the machine that churns out Subprime loans”. TOTALLY TRUE BUT “the Subprime problem” is not such a big problem in absolute terms and IN ANY CASE even in your own gloomsville scenario is not problem for AAA structured note holders… Nor was it a real problem for Thornburg or Countrywide… It was investor panic that was the problem - Let’s be honest you have nothing to fear but fear itself Mr Bass and that is always true… All banks are leveraged in any case and always have been (8% capital adequacy implies 12.5 times leverage) so it’s not CDOs that are the problem and certainly not CDO AAA tranches Mr Bass, it is all the mushrooming ADs investors have in their mental portfolios. It’s a different king of leverage I admit but THE FACT IS that subprime is just a small fraction of the mortgage market and you have clearly become unhinged by panic Mr Bass!

    Perhaps we can all wake up and start smelling the “all things mortgage related ADs coffee” now? For your information Anxiety Disorders (ADs) are a group of problems characterised by fear and anxiety often resulting in changes of behaviour called “avoidance behaviours”. Although everyone experiences anxiety from time to time, anxiety becomes a disorder when the symptoms or avoidance behaviours interfere with a person’s life and stop them doing things they should want or need to do… The right treatment may depend very much on the individual’s genetics and environmental factors. Luckily mental conditions, such as anxiety disorders can be thought of as a pathological overlay around an intact core. The problem may abate through simply talking about them i.e. therapy. Personality disorders, by contrast, run deeper and are hard to treat if the patient denies there is a problem at all. I would recommend not trying to focus too much on your mental breakdown - Let’s just move on and spare your blushes if that’s OK with you?

  13. Aug 22   4:51 Posted by Housing Wire » A Recovery That Will Lead to Relapse: Why We’re Not Out of the Woods Yet [report]

    […] The ratings cuts so far have been because early losses on 2005 and 2006 vintage mortgages have accumulated to the point that the ugly future is now clear — but not because we’re actually there yet. Investors have figured it out too, and have literally put the brakes on an entire market as a result. A well-read letter from Kyle Bass at Hayman Capital puts it thusly: If you plug in 15% depreciation in housing prices and 50% loss severities into our Subprime model, the capital structure is wiped out all the way to the “AA” tranches. […]

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