I don’t often need to read things twice to understand them. Though I just read that once, I couldn’t understand it.
this is a good one!
Texas - Suckering idiot Yankees who think they’re smarter than the “dumb rednecks” since 1836.
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 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.
Amherst is just doing what AIG should have been doing all along.
AIG sold insurance on bonds. If the bonds defaulted, AIG pays up. Except, this is special insurance...called a derivative...also known as a credit default swap.
And because it’s special, people in addition to the original lender can buy it.
With normal insurance, only say...a homeowner can purchase fire insurance on her house.
...but with credit default swap insurance, your neighbors and friends can each purchase fire insurance on *your* house.
So multiple credit default swap insurance policies can be sold for the same house. If your one house burns down, then AIG has to pay each of your friends full face value for your house; multiple payoffs.
Amherst did the math and saw that was silly. There were 5 brokerages on Wall Street betting that these circa 2005 Lehman sub-prime mortgages would default, so Amherst sold 5 insurance policies.
Wall Street was so certain that these loans would default that they were paying 90% of the home mortgage value as their insurance premium to buy the credit default swaps.
5 * 90% = 450% of face value.
Amherst then bought the mortgages and paid them off with their own money. Thus, the deadbeat homeowners couldn’t default...they got their houses for free.
And Amherst got 450% of the face value of those toxic sub-prime loans by selling so many credit default swap insurance derivative contracts to the brainiacs on Wall Street.
Easy money. Amherst *knew* that those loans couldn’t default because Amherst was buying them.
Well, that’s how AIG’s derivatives should have been handled.
Instead, the Fed paid off all of AIG’s contracts. That’s like paying out Amherst’s 450% above due to being too stupid to know to just buy the discounted loans.
Bump for later reading, rereading and further rereading.
At first read is seems like goobly gook to me, but it sounds interesting and ironic.
I’m assuming that the CDS “premiums” paid to Amherst were more than sufficient for them to pay ten cents on the dollar, and yet still retain a handsome profit?
I much prefer the tiny brokerage houses anyway.
**************
Women: So, you’re in ‘the market’?
George: Yeah I’m, eh, in ‘the market’.
Women: Which market?
George: Which market, the, eh, big one, the big market, the big board. Bull market, bear market, you name the market, I’m there.
Women: So, do you work for one of those big brokerage houses?
George: They wish. I hate the big brokerage houses. Hate them with a passion. Big brokerage houses killed my father.
Woman: Really?
George: Well, they hurt him bad. Really hurt his feelings. It’s a long story. I- I don’t like to talk about it, but I swore then that I would never work for big brokerage houses. See, all they care about is money. I’m about more than money, I’m about people, always gone my own way and I’ve never looked back.
*Train horn blows and George looks back*
WTF???
Do I need DiffEQ to figure this one?
(Plain old calc ain’t worth squat!!)