RBS among victims of broker coup on Wall St

Source: This is London

Texan broking firm Amherst Holdings is said by the Wall Street Journal to have forced big banks into losses of tens of millions of dollars when they believed they were on to sure-fire profits.

The trade involved $29 million (£17.6 million) of securities that were backed by subprime mortgages. The big banks believed that these were almost worthless and so bought credit-default swaps based on them. These effectively act like an insurance policy paying out if the securities become worthless.

Traders for JPMorgan are reported to have paid between 80 cents and 90 cents in the dollar forthe credit-default swaps betting that they would get a dollar back. Royal Bank of Scotland andBank of America also bought some of the credit-default swaps. Up to $130 million of bets weretaken against the original $29 million of securities.

But somehow Amherst engineered that the underlying loans were paid off and the bonds repaid. Thatmade the insurance worthless and all bets were off.

Read more: http://www.thisislondon.co.uk/standard-business/article-23706186-details/RBS+among+victims+of+broker+coup+on+Wall+St/article.do

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Amherst Holdings took recognized the same flaw with the "naked" credit default swaps that I have been discussing here for months: If the underlying loans are paid in full (think of it as a special version of refinancing with paying off at 100% the original loan), then the value of ALL the related swaps goes to zero!

I had been pushing that as a way to limit the risk to the gov/taxpayers to that of the bad loans "once" rather than multiple times making good through AIG on the bets involving swaps.

Amherst Holdings found a way to make money off this issue.

(This was first reported by WSJ, but their article is still behind the login.)

Financial pirates suckered with their own game... poetic!

That is the question we should be asking when we talk about regulation. Seems like there is a whole bunch of capital that could be used in building factories and businesses being tied up by banksters in their casino :shrug:

This particular example might provide some educational value to those in NY and DC, but little more.

"Naked" short selling of stocks devalues companies and ultimately makes it impossible to continue operations, hurting their employees, shareholders, clients, and communities.

"Naked" credit default swaps, multiple insurance policies against the same real asset, only have value when the underlying asset is made worthless.

"Naked" commodities/energy trading, where delivery/acceptance of commodity is avoided, lets speculators reap enormous profits while avoiding most of the risks traditionally associated with such actions. (Remember the Hunt brothers attempt to corner the silver market.).

I wonder how they engineered that the loans would be paid off in full? Contact the homeowners and pay large chunks of their mortgages with the proceeds from the sales of the CDS? That would be an interesting strategy! LOL! Since the sale of the CDS generates, let's say 85 cents on the dollar on $130MM notional, Amherst got about $110MM cash to apply towards paying down the mortgages of the homeowners - probably more than enough! HAHAHA!! That is fucking great! The market for naked CDS actually providing value for the little guy? Of course, I am just speculating on how Amherst pulled this off, but something like this sounds feasible.

n/t

and cannot refinance. You may be right though if Amherst agrees to be a guarantor.

and it never occurred to them that the counterparty could take $29mm out of the $130mm and pay it off themselves?
brilliant.

and, obviously, the $130mm bet went way beyond "hedge" and deep into gambling.

and you had to pay the dollar,I think you just lost 20 cents.Right?

The bets would pay if the underlying instruments defaulted. Amherst somehow bought the underlying instruments (probably agregated instruments, not the individual loans) at full face value. Thus, all those who had bet on the defaults lost their entire bets.

This is an extreme version of what I have been advocating for over six months.

Once Amherst figured out that the max it would cost to negate the swaps was the full face value of the obligations ($29M), then anything above that would be immediate profit from the suckers who had thought they were the ones being clever. Amherst still has the portfolio of notes which have some remaining value.

Here is a discussion from this March discussing the "refinacing" options and how it work and save everyone money. My first postings begin with number 41.

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=389x5359700

a total default with zero recovery which would then make the CDS worth 100 cents.

Another way to think of it is shorting a bond at 20 cents and having it go to zero. Usually bonds do not go to zero though since there is some recovery in most cases. That would be reflected in the CDS as well, which would not usually go to 100 cents on the dollar due to recovery.

Usually for CDS, one does not pay anything up front, but in the case of distressed underlyings (these were severely distressed in this example), points up front have to be pais - here 80-90 points up front were required.

Thanks.I'm a dork.

As Cynk from the TYT has said, we should be liquidating any firms that so desperately need our BailOut money. The investment firms or banks should be in receivorship. Then the contracts, including contracts that stipulate that the Credit Default Swaps must be paid first, and the bonuses must be paid first, would become null and void. Having those contracts null and void is key. Not everyone is as smart as Amherst Holdings - In a sense, Amherst is a hero. They screwed these suckers at their own game.

The fact that the Credit Default Swaps must be honored first, according to the contracts, is quite disgusting.

Please Note how this works - If the BailOut monies was first used to prop up the investment entity end of things, then that would mean that some of those wanting their bets on loss to be covered IN FULL would not have losses any more. (Those in the inner circle were pretty much overwhelmingly focused on betting against our economy -and of course that was a good take, given what happened.) So we need those contracts null and void.)

Also, we don't need people sitting around and re-inventing the wheel, do we? We all know that our economy was rather well protected back in the days when we had Glass Steagall in place.

So re-instate it already. Scrap the 1999 Banking Reform Act and scrap the Credit Modernization Act of 2000 (The act fashioned I believe by Gramm)

Geithner keeps bragging about his regulations etc. But his regulations will come with so many loopholes a fishing net will look solid in comparison. Even his creating an entire department supposedly for the sake of the consumer is fatr less corrective a measure than simply re-instating Glass Steagall.

That would have left us with "just" a housing problem, would have punished those betting against the economy and each of us (mostly "investment banks", not "real banks"), and would have maintained some level connection between actions and consequences, between risk and rewards.

Edited to add: I agree with you overall, particularly about reinstating G-S, etc.

So appreciate the feedback.

I should not have to be self taught on economy - my son got a degre in economics - but it gave him a background more focused on calculus than anything else.

And a best friend has a PHD from University of Chicago in economics - and I don't even want to talk to her about economic issues. From her viewpoint, it is all supply side stuff, and if I don't get it, then it indicates what a Neanderthal I am. I mean, job creation? What sort of yesterday person would even suggest we need job creation?

I find Chicago economics to be little more than a cover story to obscure insider trading and market manipulation on a daily basis. The various financial markets based in Chicago are some of the worst in the country IMNSHO. They would know recognize a fair market if they saw one. For them, it is all "me" vs "we", winner-take-all behavior. I prefer grand coalitions that make "winners all", although everyone might not win equally. W-T-A is not sustainable on repeat transactions.

I first published research in related areas doing actual experiments comparing human behavior with math models, game theory, etc. nearly 40 years ago and have been a provider of software and other technology to finacial markets and others since then.

I probably learned the most, though, growing up on a farm and deeply involved with the various commodity and auction markets -- cattle, hogs, grains, truck crops, tobacco.

I worry about the influence that Chicago academics have on Obama and that he has seemed too compliant so far in his dealings with big money. Time will tell.

I was against any bailouts of financial institutions.

What you needed was vigorous prosecution of the ratings agencies, mega banks and hedge fund executives who plundered the world. Heads on a pike, as an example to future generations.

The bailout monies could go instead to establishing a public banking sector that replaces the thieves.

But anyway, as you point out: there are multiple credit default swaps on the same mortgage bond, say, and most of them are by people who bet against it without even owning it (naked). So when the bond fails, AIG has to pay off CDS's worth many times the original value of the bond. Of course, AIG doesn't have the reserves to cover this, in fact, that would be impossible (since multiple bets were possible, they went into the trillions). So the government chooses to cover that. (Motherfuckers, I can't believe this was legal!)

But as you say, it's crazy. Because all the government has to do is cover the original bond, and suddenly all the credit-default swaps don't have to be paid. This too would reward failure, but they would pay for the original bond once, instead of the credit-default swaps many times over. But they didn't, which is more evidence that the bailouts are a scam, and the AIG bailout in particular was just another way to funnel money to Goldman Sachs and the other counterparties.

... these fuckers BANKRUPT the country with this toxic crap and THEY ARE STILL PLAYING IT.

Only now when they got played does Wall St. want a referee to step in:

I have yet to see a convincing reason to allow any "naked" swaps, certainly not any that are not fully backed by "hard" asset reserves.

And I am being mostly sarcastic.

I agree they should be regulated or outlawed.