Thursday, June 11, 2009

Making A Mint Off Of Insurance

If you could collect high homeowners' insurance premiums from Florida beach dwellers, but somehow, at a nominal cost, control the path of hurricanes so that they'd never hit Florida, you could make a mint.

If I understand the matter correctly, something like that happened with credit-default swaps: Amherst Holdings made a mint, and J.P. Morgan is screaming bloody murder:
The hot topic in the credit markets today was a controversial trading strategy by Texas brokerage house Amherst Holdings, which sparked losses for some Wall Street banks.

Amherst had sold credit-default swaps on a batch of subprime mortgage-backed securities and later arranged to pay down the souring bonds to avoid making big payouts to swap buyers. Banks that had bet against the securities by purchasing the swaps, which are insurance-like contracts, were left with worthless positions after the bonds were rescued in April.

Early today, members of the American Securitization Forum, an industry association, held a conference call to discuss the transaction and whether there ought to be certain ground rules for traders in the mortgage debt and credit-derivatives markets, according to a person who was on the call.

There also was a debate about whether institutions should be allowed to sell credit-default swap protection if they could exercise options to buy out the assets the swaps are tied to.

Wall Street traders have been buzzing about who Amherst was trading on behalf of. The firm is mainly owned by its principals and employees, but it also counts a number of private-equity firms and hedge funds as equity investors. Some hedge funds managed by Whitebox Advisors, of Minneapolis, hold stakes in Amherst. Andrew Redleaf, Whitebox’s founder, says he is unaware of the trade.

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