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.
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....
They didn’t buy insurance as an expense; they bought it as a tradeable investment asset. They didn’t own the bonds that the insurance contracts were written on (or at least nowhere near as many as they bought insurance for). And there was no “insurance company”. Amherst itself sold the “insurance” — contracts called credit default swaps.
Credit default swaps overwhelmingly exist as market gambling tools, not as actual insurance. If they were being used as insurance, there wouldn’t be swaps “insuring” several times as many bonds from a specific issue, as were ever issued. It’s like if 50 different people held insurance policies on your house. You may have one insurance policy on the house that was actually bought as insurance, but the other 50 people obviously had something else in mind when they bought their policies, since they don’t have a financial interest in the house to begin with (and no, you can’t actually do that with houses as far as I know, but you can do it with bonds).