Posted on 06/11/2009 7:09:27 PM PDT by FromLori
Today’s Wall Street Journal carries the amazing story of a small Texas brokerage that pulled a fast one on some of the biggest banks in the world. The short version goes like this. Amherst, the Texas brokerage, and others sold hundreds of millions of dollars of credit default swaps on bonds back by $29 million of subprime mortgages to JP Morgan, Goldman, UBS RBS and other banking giants.
The banks paid steeply for the swaps—up to 90 cents for every dollar of insurance—but thought it was easy money. After all, these were Lehman packaged California subprime loans made in 2005, a class of loans that pretty much define toxic. The upside seemed limited but almost certain. What happened next is that a loan servicer, probably at the behest of Amherst, turned around and bought up all the mortgages, paying them off in whole.
Apparently because the original amount of loans backing the bonds was $335 million—meaning the amount of outstanding loans had fallen to just 10% of original amount due to defaults and refinancings—the mortgage servicer was free to buy them up and make bond holders whole. Of course, this meant that the entire $130 million of credit default swaps was suddenly worthless. The banks are sure that the mortgage servicer was acting on behalf of Amherst, which would mean the 100 person Texas brokerage had made a tidy sum by buying toxic mortgages while selling insurance on the bonds.
The banks are crying foul, although it’s not clear if anything illegal happened. It may just be that the banks were simply outsmarted by a wily brokerage who had found a way to exploit the unhealthy appetite for these credit default swaps. We can squint out eyes and see this as Wall Street getting punished for its greedy desire to
(Excerpt) Read more at businessinsider.com ...
I don’t often need to read things twice to understand them. Though I just read that once, I couldn’t understand it.
It’s not just you. I read it 4 times and I still don’t get what they did. There must be missing information.
this is a good one!
Bought insurance on known ‘bad’ debt
Bought up / piad off the bad debt for $0.10 on the dollar
Made the bonds whole
Kept all the insurance dough
Better not mess with Texas....
there’s a better explanation with a diagram in today’s wsj.
Texas - Suckering idiot Yankees who think they’re smarter than the “dumb rednecks” since 1836.
They bought insurance, that’s an expense.
So what “insurance dough” do they get to keep?
So what “insurance dough” do they get to keep?
The banks are alleging the brokerage and the insurance company were in cahoots.
Basically, the banks bought insurance against those bonds tanking, which would have resulted in a huge premium when they did tank.
Instead, the insuring firm (Amherst) *paid off* those bonds, early, thus insuring they didn’t have to pay out any of the “insurance” money and that not only were the banks out the money for the bonds in the first place, they were out the insurance premiums *and* whatever else they’d leveraged off it.
Much like credit cards, actually. If you pay off your cards early, the credit card company can actually lose money. Same kind of thing here.
er “huge premium” should have read “huge payout”.
See the posts following yours.
Credit swap = insurace against default
Bonds paid off means no default
The little guy keeps the insurance (credit swap) dough.
Cahoots are not, the little guys got one over on the city slickers....
Exactly!
So who’s more to blame here if anyone? I mean, which companies’ greed was worse? The bank thought it was a good deal for them, all the companies are motivated to their own best interests. They sure the hell weren’t doing charity work when they bought subprime loans expecting they were going to do well because of it.
I think it is the case of a big city bank crying sour grapes, personally. They got beaten in a clever fashion and they’re crying about it like small-time little pussies.
I enjoy your posts. If you have a ping list, put me on it.
The crowd at Dealbreaker is having fun with this.
http://dealbreaker.com/2009/06/small-texas-firm-picks-off-jpm.php?show=comments#comments
(warning to those unfamiliar with Dealbreaker: there is NO moderation over there w/respect to use of obscenities, etc, and these are mainly young male traders spouting off — not a good site to visit from your work computer if you have prudish internet-use spies)
The only thing making Wall Street angry about it is that they didn’t think of it first.
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