Posted by: Nicholas Davis | June 12, 2009

CDS sleight-of-hand: David v Goliath

Loved this story from Econbrowser, following a WSJ article:

“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.”

Great stuff. On one hand, notional CDS values exceeding actual is a recipe for systemic risk. On the other hand, it makes for a great strategy if you can find enough fools to buy insurance against an asset you can own and control with the proceeds…

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