Interesting story in the Wall Street Journal: “A Daring Trade Has Wall Street Seething“. Amherst Holdings of Austin TX sold $130 million of credit default swaps to several counterparties including JP Morgan and Royal Bank of Scotland. They earned a premium of 0.80 or more since half the pool of California mortgage loans were in default. That seems high to me, it assumes most of the rest of the pool will default also.
The amazing thing is that the pool was $29 million so the banks were just betting their TARP money.
Next Amherst got the servicer, Aurora Loan Servicing, to issue clean up calls to buy in the loans. That way, Amherst will not have to pay off on the CDSs they sold, since all the loans paid off at par.
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