Apparently there’s a banker born every minute
James Hamilton happens on a Wall Street Journal story about credit default swaps, and is positively gleeful as he relays it:
[T]he WSJ recounts [behind paywall] the tale of a security based on $29 million (par) worth of subprime loans in California, half of which were already delinquent or in default. Betting that the loans weren’t worth $29 million sounds like easy money, and the smart guys were willing to pay 80 to 90 cents for each dollar of CDS insurance.
It appears from the WSJ account as if little Amherst Holdings of Austin, Texas was happy to sell the big guys like J.P. Morgan Chase, Royal Bank of Scotland, and Bank of America something like $130 million notional CDS on a $27 million credit event, used the proceeds to buy off and make good the underlying subprime loans, and pocketed $70 million or so for their troubles. The big guys, on the other hand, paid perhaps a hundred million and got back zip.
Diabolically clever. And of course, the big guys were impressed at the sheer brilliance of the maneuver.
Oh, wait, no, they weren’t:
Said big guys are screaming bloody murder, trying to bring in the lawyers to show that Amherst wasn’t playing by the rules of the game.
Cue the nanoviolins in the key of $.
