Posted on 06/11/2009 7:09:27 PM PDT by FromLori
ok, the whole cds debacle is because you can buy insurance on stuff where you have zero relationship with the insured and you can sell insurance without putting aside money to cover losses.
this leads to rampant speculation and gambling.
that is you can buy life insurance on a person and then have him killed (figuratively speaking) or you can buy insurance on bear sterns then short the crap out of the investments bear holds “killing the insured”
In this case, the big banks bought life insurance on a patient who was dying making what they thought was a good bet. Then they leveraged themselves and bought more life insurance thinking they would make money. They did this even though they had no relationship to the dying man (defaulting mortgages).
The little Texas bank sold the life insurance even though they had no relationship to the dying man/mortgages. Then the little bank made sure the man/mortgages outlived the insurance.
Normal with a real dying man this does not work but because they could sell insurance on the same man/mortgage many times over, it worked.
Yep, and the question now is whether it was illegal. It was certainly unethical IMO.
They made a bet. They bet that the bonds would default. This Texas company realized that the volume of bets outstanding exceeded the market value of the bonds, so it made sense to buy the bonds so they would not have to pay off the bets.
No, it’s not unethical to pay off someone else’s bonds so that there is no loan default. That’s often mere charity; in this case it made business sense, too.
...that large Wall Street players assumed that no one would be so clever is another story altogether.
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