Hedge Fund Manager Testifies On How To Avoid Another Financial Crisis

The big bank chiefs got most of the press on the first day of the Financial Crisis Inquiry Commission's inaugural hearings on Wednesday. If you want to quickly understand why we had to have a crisis in the first place - and how best to avoid a repeat - read the succinct testimony of J. Kyle Bass, a Dallas hedge fund manager who made a fortune betting against subprime mortgage bonds in 2007.

Bass testified on the panel that followed the bankers. His focus was on the ridiculous amount of leverage that major financial institutions were allowed to employ in the credit-bubble years. Leverage, of course, is what makes the modern banking system possible. With a capital base of just $4 you can make $100 worth of loans. But as Bass noted, leverage went far beyond 25-to-1 at many financial giants in the boom years.

When it all blew up, it wasn't hard to wipe out some players' capital almost overnight. And the most leveraged of all, as Bass documents, were the government's own creations, mortgage titans Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE). "At one point in 2007, Fannie was over 95 (times) levered to its statutory minimum capital," he told the commission.