Austin, TX Sticks it to Wall Street

The Wall Street Journal ran a great article on Thursday about how a small investment firm in Austin made a clever trade at the expense of some of the biggest Wall Street firms. Amherst Holdings wrote credit default swaps on a specific pool of mortgages, which had $29 million in loans outstanding out of an original pool of $335 million. Because these remaining loans were the dregs of the pool, everyone assumed they would default. So JP Morgan and Bank of America and their pals were willing to pay 80-90% of the face value for insurance that would give them 100% on default, apparently assuming that their own genius would allow them to book a risk-free 10-20% return.

Because people can buy these swaps without owning the underlying bonds, Amherst wrote about $130 million of the swaps, pocketing $104 million to $117 million. With the proceeds, Amherst went and paid off all $29 million of the mortgages. Therefore, there were no defaults, the swaps expired worthless, and Amherst got to keep all the proceeds. Genius! According to the WSJ, the big banks are “seething” at being outwitted by a Texas runt, and are complaining to various authorities. Wait, aren’t these the same banks who are lobbying against regulation of credit default swaps? And now they are complaining to the authorities? Stop crying like whiny little babies and take your losses. Welcome to the new world, masters of douchebaggery.

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