You've got to hand it to the guys at Austin-based Amherst Holdings, they've got some serious moxy. Over the past year, Amherst sold credit protection to JPM on some Lehman-issued subprime MBS and later encouraged the servicer, Aurora Loan Services, to buy the outstanding loans. This made the CDS it sold to JPM completely worthless (BAC and RBS also bought protection on the bonds, but through other counterparties). Far from admitting any impropriety, Amherst contends that it was simply in the right place at the right time.
Amherst says it didn't do anything improper, but took advantage of an opportunity when it emerged. A lawyer reviewed and blessed the strategy for the firm, according to people familiar with the matter.
Privately held Amherst says it acted in good faith trying to limit losses for clients, who had sold credit-default swaps on the securities. "We wouldn't jeopardize our business and reputation by entering into an opportunistic trade knowing what the outcome would be," said Amherst's chief executive, Sean Dobson.
A Daring Trade Has Wall Street Seething [WSJ]
Posted by guest , Jun 11, 2009 1:31PM
"Moxy?!"
Are you writing for a 1930s Little Orphan Annie cartoon, anus?
Posted by guest , Jun 11, 2009 1:34PM
@1 Harsh...
Posted by AndrewInGreenwich , Jun 11, 2009 1:35PM
Excellent read...good spot GM
Posted by guest , Jun 11, 2009 1:37PM
@1 - perhaps 'pluck' would be better suited?
This website is bad for the soul, and I'm alright with that.
Greg: the more they hate, the more they love. Take it in stride.
Posted by guest , Jun 11, 2009 1:41PM
Goddamn Amherst alums.
Posted by guest , Jun 11, 2009 1:42PM
With no subscription to WSJ, TGFD couldn't read the article.
I don't understand why "Wall Street's Seething", unless they don't know WTF happened either.
Why were "the CDS it sold to JPM completely worthless"?
Perhaps someone would be kind enough to explain. Thanks.
The Guy from Delaware
Posted by guest , Jun 11, 2009 1:45PM
@6 Type the exact article title in Google and click on the first link in the search results.
Posted by guest , Jun 11, 2009 1:47PM
Do a google search for the article snippet, then click the link. WSJ lets you in with google as referrer.
Posted by guest , Jun 11, 2009 1:48PM
@ 7 stop telling people what to do, dick.
Posted by guest , Jun 11, 2009 1:49PM
@6 MBS servicer has the option of buying the loans instead of defaulting. so, Amherst paid off the servicer to buy the mortgages rather than pay on the CDS. So, CDS banks bought expired worthless, since the principal was paid in full.
Posted by guest , Jun 11, 2009 1:52PM
Can't really understand why JPM would be upset. If they want to play in an unregulated market they run the risk of running up against counterparties who are either smarter then they are or who are willing to game the system. Or, in this case, both.
Posted by guest , Jun 11, 2009 1:53PM
Nice work Amherst (although I am not sure this originated at the austin office). Amherst could only pull this off because currently "investors" are allowed to buy "protection" against a position that they do not own or have an economic interest in. That allowed Amherst to "overwrite" thus collecting premiums several times over, which then gave them plenty of slush to get this one bought in. Doesn't anyone at JPM know that there is no such thing as a sure thing?
Posted by AndrewInGreenwich , Jun 11, 2009 1:53PM
@10
We don't know that they, "paid off" anyone.
Posted by guest , Jun 11, 2009 1:54PM
So, in essence Amherst really stole TARP money from JPM and BAC and money from the UK Government? Is that what we're talking about?
Posted by Porker Stankleberry , Jun 11, 2009 1:55PM
This was in AIG's game plan - sell CDS to one and all, and then, in a pinch, pay off the loan from the proceeds.
It's great, until it stops working.
Posted by guest , Jun 11, 2009 1:56PM
And they got the large majority of the funds to buy the loans out of the deals from the CDS premium. Now they get to keep whatever they ultimately recover from the liquidation of the properties underlying the bad loans. If they paid 10-20 cents of their own cash to buy a dollar of mortgage principal, housing prices not fallen that much and they probably more than double their money while the cds purchasers are out their entire premium with no recovery.
Posted by guest , Jun 11, 2009 1:58PM
ANUS!
Posted by guest , Jun 11, 2009 1:59PM
@12 if you buy protection you are paying a premium, not receiving it. wtf is your deal?
Posted by AndrewInGreenwich , Jun 11, 2009 2:01PM
@18
Amherst sold the protection...read the article.
Posted by guest , Jun 11, 2009 2:01PM
US$134.5 billion in US government securities seized from Japanese nationals, not clear whether real or fake. This is the largest financial smuggling case in history. But are they real? Concern over ‘funny money’ or counterfeit securities is spreading in Asia. The international press is silent.
http://www.godlikeproductions.com/forum1/message814005/pg1
Posted by guest , Jun 11, 2009 2:02PM
@18, 12 here - what are you reading? Amherst collected "premiums" that JPM bot (as a sure thing investment).
Posted by SgtJack , Jun 11, 2009 2:05PM
12 and 21, you just answered your own question. Twice.
Posted by guest , Jun 11, 2009 2:05PM
Even if they didn't do it this way, they could have bought the houses from the individual homeowners, or refinanced them, or any number of variants to make sure the payments are made. That's what you get when the side bets exceed the main event purse.
Posted by guest , Jun 11, 2009 2:05PM
Guest@#10...
Thanks for the explanation.
TGFD still doesn't understand why JPM is "seething". All they lost was the premium they paid for the CDS. No?
I guess if you don't win every bet, you "seethe" and complain. That's the answer.
The Guy from Delaware
Posted by guest , Jun 11, 2009 2:08PM
I am a homosexual male prostitute living in the lower east side.
Where is the money you owe me Greg Michaels?
Posted by guest , Jun 11, 2009 2:09PM
JPM, BAC, and RBS all lost money and we are supposed to feel sorry for them?
What about all of the PA school districts that were burned by JPM and their toxic swap products.
Tell them all to suck it.
...he who plays with fire will be burned..
Posted by guest , Jun 11, 2009 2:11PM
12
So you think that investors shouldn't be able to buy CDS on things they don't own? This was one of the few early warning signals markets had regarding the shoddy nature of these securities. Why would you want to stop that? JPM got hosed because they got outmaneuvered, not because they made a bad bet on mortgage markets.
Posted by guest , Jun 11, 2009 2:14PM
Amherst is playing the game that all the big boys can play too.
It's the Wild Wild West out there.
Stop bitching, grown boys don't cry.
PS. If anyone can produce the exact text in those CDS contracts it would be a first.
Posted by guest , Jun 11, 2009 2:14PM
Smart is as smart does.
~F. Gump
Shrimpco Capital Mgmt
Tribal Tattoo, Alabama
Posted by guest , Jun 11, 2009 2:15PM
the article was pretty straight forward, even has a lovely graph, how on earth you can read the article and still walk away confused...well..unless you work for JPM, then I can understand.
Posted by Ben_H , Jun 11, 2009 2:16PM
Guys on our ABS desk had this idea a while back, but legal shot it down... *sigh*
Posted by guest , Jun 11, 2009 2:19PM
The banks paid premium of 90 cents on the dollar in hopes of a sure 10 pct gain. Sounds like Amherst used the proceeds from the Insurance sales to buy out the souring notes.
Poof! 'Sure thing' gone.
What group of super-financiers couldn't figure out this adverse outcome? K to the L's gang, amongst several others
Posted by guest , Jun 11, 2009 2:20PM
@27, I agree. 2 points:
1. Jpm should not whine. since this was their own game.
2. I doubt this would have happened if open interest were collected and posted.
Posted by guest , Jun 11, 2009 2:21PM
i love how there were only $29mm bonds outstanding but $130mm of cds contracts were written on them. serves the greedy pigs right. they were probably laughing their a$$e$ off at the multiple, thinking they were royally screwing amherst!
wat-wat-wahhhhhhhh
Posted by guest , Jun 11, 2009 2:24PM
@ jack (#22) - question? Did I have a question?!? -12
Posted by guest , Jun 11, 2009 2:25PM
@33
27 here
Did the idea also involve Amherst buying said loans from Aurora?
This idea would work if Amherst felt it could better manage the losses than Aurora.
Posted by Porker Stankleberry , Jun 11, 2009 2:27PM
TGFD: The reason they're seething is that they made a directional bet, rather than hedging an existing position long the debt.
A lot of people (collectively known as "idiots") claim that these derivatives should only be available to people with positions to hedge. I disagree, as long as speculators can be out-traded, when they deserve to be.
Posted by EvilBuzzard , Jun 11, 2009 2:31PM
When someone from a place like Texas says "I'm just a simple country boy.", put one hand over your wallet, and the other one over your nuts. The wallet is about to be stolen and crotch is about to be drilled. GUys like that just love it when they get to yince a hot-shot financier from NYC.
Posted by guest , Jun 11, 2009 2:33PM
Amherst Holdings a subsidiary of J.T. Marlin.
Posted by guest , Jun 11, 2009 2:34PM
@27 (12, 18, 27 here - i gotta get a logon) I have no direct knowledge of Amherst's complete plan. The beauty is as soon as the overwriting took hold (looks like almost 5x), it became money on the bank no matter how it unfolded.
Posted by guest , Jun 11, 2009 2:44PM
@38, very true. People from Arkansas are probably the worst for that. They'll try to convince you how dumb they are the whole time they are taking your money. Dumb like foxes.
Posted by guest , Jun 11, 2009 2:45PM
I've always found that it is the hedge fund's lawyers who let such pearls of news slip out. Traders don't want anyone to know such delights.
~Guy From Texas
Posted by SgtJack , Jun 11, 2009 2:46PM
12,35 - my bad too many appletinis at lunch wrong number.
Posted by guest , Jun 11, 2009 2:47PM
@38 what is yince
Posted by guest , Jun 11, 2009 2:58PM
Why are you all targeting the guy? I must have missed something. Did you expect Bess #2?
Posted by EvilBuzzard , Jun 11, 2009 2:59PM
@44 - Yince - a colloquialism for "screw over" or gip. Originally a piece Yiddish slang.
Posted by guest , Jun 11, 2009 3:03PM
Love it. "Smartest Guys In The Room" reamed by a bunch of upstarts. Awesome. If the brain-trusts at JPM had conceived of it instead of Amherst there would be no end to the frat-boy high-fiving and self aggrandizing, instead they get some Preparation H and an ice pack.
Btw its also probably high time we stopped looking upon JPM as some sort of financial legend, good 'ol JPM himself was not only a draft-dodger (paid someone to take his slot in the Civil War) but profited enormously (as the govt's chief purchasing agent) from WWI. There is also considerable speculation re JPM's involvement in pushing the US to become engaged in WWI...you see JPM had sold a bunch of his US clients Euro war bonds, and seeing as the war wasn't exactly going Euros way (and hence the high risk of default), JPM and its clients had everything to gain from US entry. cant make this stuff up, bet that's not in the Annual Report or the "Core Values" twaddle they inflicted upon staff.
Posted by guest , Jun 11, 2009 3:05PM
@ jack (#43) 12 here - sounds good.
Posted by EvilBuzzard , Jun 11, 2009 3:19PM
@41 - Used to live and work near Ft. Hood. Worked with a bunch of born BS artists. I think its something the Army polluted the drinking water with. Dumb like foxes is correct!
Posted by NegativeConvexity , Jun 11, 2009 3:19PM
All is fair in love and war/business.
JPM should refer to 'NJ nurse vs UBS' to see how sell side typically treats their clients. Unfortunately for House of Morgan, the fine print is a two-way street.
Posted by guest , Jun 11, 2009 3:33PM
@38
Makes me so happy that my brat is a Texan. Still in training though.
Posted by guest , Jun 11, 2009 3:44PM
Serena Ng has been on this story for months. There's nothing really new here; basically it's a question of making sure you buy more protection of the reference asset than is out there. CDS short squeezes have been going on for years--the collateral trades up (or this case, is bought out at par, which the servicer in many cases is allowed to do for the "best interests" of the trust), and if you are short protection, you kill it.
The basic issue here is that clearly JPM didn't read their documents and recognize that this exposure existed. It's really a very basic trade. And while Sean Dobson is bright as are many of his trading honchos and analysts, dozens of other folks have done versions of the same thing.
Posted by guest , Jun 11, 2009 3:47PM
Fort Worth is the new Austin.
Posted by guest , Jun 11, 2009 3:49PM
@47 thats some tinfoil hat you got there
Posted by guest , Jun 11, 2009 4:03PM
My fantasy would be for the JPM gang to meet the boys from Austin at a ranch somewhere, and get into a shootout. With any luck there'd be no survivors.
Posted by guest , Jun 11, 2009 4:42PM
Maybe someone can help me out here:
JPM, et. al. only lost out because they were paying premiums on CDS ABOVE the amount of bonds they actually held?
Otherwise, if they were just paying premiums on the bonds they held, wouldn't they still be making out because the bonds were being paid in full after the resale?
Posted by guest , Jun 11, 2009 4:45PM
Yeehaw, bitches
Posted by guest , Jun 11, 2009 4:56PM
@56
Only if JPM et al. owned the underlying bonds, which wasn't necessarily the case.
Posted by guest , Jun 11, 2009 4:57PM
@47 - I didn't know "'ol JPM himself" still worked there.
The Amherst guy's are even smarter when you consider that they pay zero in state and local income taxes.
Posted by guest , Jun 11, 2009 4:58PM
great article!
Posted by guest , Jun 11, 2009 6:50PM
@56, would make sense if it were as a hedge, but as another commenter pointed out, it was a directional trade (they were essentially shorting the bonds by buying CDS).
I admire these Amherst guys for a) gaming the deal to their advantage and b) being smart enough to live in the greatest city in America--Austin, TX
Posted by NotNasser , Jun 11, 2009 8:54PM
It seems to me they did nothing wrong at all. If my fire insurance company wants to fireproof my home, is that sneaky of them, or admirably enterpreneurial?
Posted by guest , Jun 11, 2009 10:11PM
I want them hunted down and killed.
Posted by guest , Jun 11, 2009 10:30PM
@62
You're right; Amherst outwitted the big boys. I'd rather not think about the (presumably legal) Faustian deal made with Aurora, or whether Amherst will be blackballed by banks as a result of its *gasp* ingenuity, and just savor this ephemeral glance at unadulterated capitalism.
Posted by Lowly Assistant , Jun 12, 2009 12:17AM
The graph provided by WSJ is nothing short of amazing. I love that we're all still considered adolescent by the press.
Posted by guest , Jun 12, 2009 2:53AM
64 gets it. Amherst will be in the penalty box with these guys - and possibly others - for some time. They need to see the flow from the primaries, so there's going to be a cost.
I've worked with some of those guys in the past. Most of their desk has 10-15 years of experience; hardly new to the game. Some pretty smart guys, and few if any are actually from Texas. I think Dobson may be from Houston.
Dobson probably had this possible outcome in mind when he put on the trade. They don't have the capital to make a naked bet that big otherwise IMO.
Posted by InfiniteGuest , Jun 12, 2009 8:22AM
@1, fail, sorry. derivatives S&T, where Anus comes from. still use words like "moxie."