Yee-Haw! The Cowpokes Win One

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[Policing Wall Street]

Having been responsible for ruining the world economy I can't say I shed any tears when the big banks were burned by purchasing, not selling, credit default swaps. 

A credit default swap is a derivative contract; originally it was an insurance policy that was designed to off-load risk on a debt instrument, such as a bond. 
It had a worthwhile purpose-reducing risk for pension funds.

It later degenerated into a Wall Street version of a Mafia-run craps shoot out in the old Las Vegas. At least in the old Las Vegas, the days when Teamster pension funds lent money to the Mob, you knew that you were being cheated. 

The Wall Street Journal reported that a small Texas brokerage firm, Amherst Holdings, sold credit default swaps, which guaranteed the principal amount, on bonds that were backed by subprime mortgages. 

The fat banks, including J.P. Morgan Chase and Royal Bank of Scotland purchased these credit default swaps for as much as 80 and 90 cents on the dollar.
This factors in a 95% chance of default. The big banks were so certain that the mortgages would default that they had begun to celebrate when they purchased the bonds. 

The banks expected to get on base not with a triple-but with a bunt. But the banks did not factor in the pitcher (brokerage firm) and the first baseman (the clients).

The banks thought that they were playing against Roger Craig, Marvelous Marv Throneberry and "Choo-Choo" Colmeman for the '62 Mutts, err, Mets. 

Little did the banks know that they were betting against Pete Rose, Johnny Bench, Vada Pinson, Frank Robinson and the Big Red Machine-and Rose had already wagered on the outcome.

Amherst, a small group of Texas cow-traders, sold these credit default swaps for their own accounts and that of their clients. 

The mortgages had a face value of $27 million.

But the big banks purchased approximately $130 million of credit default swaps on a $27 million bond issue.

There they were, the Masters of the Universe shortchanging these cowpokes from Texas; telling them to get back on their horses and ride out of town. The New York Bankers were here.

Then in April the Masters of the Universe received a monthly remittance report that showed that the bonds had been paid off. The Wall Street Typhoons were outraged.

How did these cowpokes from Texas, these fellows who ride horses and not Lamborghinis like us, dare to cheat us? After all, the big bankers were the Masters of the Universe.

Well, it goes like this: The loans outstanding had fallen to less than 10%. 

Gee the Wall Street Wizards wondered, someone had purchased these bonds. And when there is less than 10% of an issue outstanding, the company that collects the payments and forwards the payments to the investors can purchase and retire the loans. 

So at the behest of Amherst, the servicer Aurora Loan Services purchased the remaining bonds. Which meant that there were no longer any bonds outstanding and the credit default swaps had expired; worthless.

The market value of the bonds was just $3 million, yet the bonds were redeemed for $27 million. The banks screamed: "Market manipulation."

What did the big banks including J.P Morgan and Goldman Sachs do? They had a conference call-but decided to do nothing.

Why would the bankers do nothing when they had lost money? Because the big banks had earned tens of billions of dollars by rigging the credit default swap markets and then insuring that the firms, which had sold them the swaps would default. 

The big banks did not want an investigation by the government into their own market manipulation.

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