a high five for these guys!

hilarious---regulator-resenting banks plead with regulators to intervene after they try to snooker a small-time shop and, due to their own incompetence and poor research, end up snookering themselves---love it

add'l irony: if only the big banks had been extensively and properly regulated as they leveraged and bubbled our economy into the sewer! haven't the fruits of deregulation been tasty as ever!!

That article made my early AM gym session almost enjoyable. Clearly regulation is a *wonderful* thing when it prevents competitors from capitalizing on your own stupidity and greed.

like a drug dealer complaining to the cops because his junkie didn't pay up, or junkie complaining to cops because drug dealer stiffed him(sorry not sure which is which here). Great story.

More reason why this should be cleared through an actual exchange and moved out of the shadows.

From Bloomberg:

This was like a freshman mistake in college,” Andrey Krakovsky, the chief investment officer in New York at Tacticus Capital, said of the banks. Krakovsky is raising money for a hedge fund that plans to use loans from the Federal Reserve to buy asset-backed securities.

Freshman read ROOKIE!

I love this story!

http://blogs.ft.com/maverecon/2009/06/the-magical-world-of-credit-default-swaps-once-again/

n obvious problem with CDS is that you do not have to have an insurable interest to purchase the insurance it provides. You have an insurable interest, as a purchaser of insurance, if the occurrence of the contingency you are insuring against would not make you better off (even when the insurance pays out). However, the CDS market is first and foremost a betting shop. You can buy CDS written on a given class of bonds, in amounts well in excess of the total face value of the bonds you own in that class. Indeed you may not own any bonds in that class and still buy CDS that pay off in the event a default occurs on bonds in that class. That is, CDS can be used not to hedge risk you already are exposed to, but to take on additional risk. CDS can be used to place pure bets.

and what Amherst most likely did....

....if the bond were some asset-backed security, purchase enough of the assets underlying the bond at prices in excess of their fair value to ensure that the issuer of the bond would have sufficient funds to pay off all the bond holders, should the bond be ‘called’, that is, retired prematurely. If in addition, I could make sure that the bond would indeed be called, I would again, through this financial manipulation, have reduced the probability of default on the bond to zero.

The bonds were paid off in full, and the CDS Amherst had sold on these mortgage bonds became worthless.

I've heard more than one comentator say, that banks earn a disproportionate amount of their money through CDS and swap underwriting. Once this goes away, the banks will be back at Uncle Ben's feet. Only by creating a private club and making money off the rest of us can they survive..

I think this is one of those examples of guys at the top not even understanding the instrumewnts that their peons are trading.

well, you can be sure they'll ban CDS On callable bonds in the future. or forbid the writer of a CDS from executing a call. Does the person who bought fire insurance have the right to prevent the fire dept from shooting the hose? Apologize if this is not the best analogy...

I think the better analogy has to do with either Zero Mostel/Gene Wilder or Nathan Lane/Matthew Broderick depending on how old you are.

that's funny. and i get them both.

Well, it's really just the inverse of the same thing, isn't it?