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Little Amherst Holdings Beats the "Big Boys" at Their Own Game.

A number of (unnamed) big players decided to take a pretty good bet; that a $29 million package of subprime loans wouldn't be money good. So they bought credit default insurance of these loans.

A small company called Amherst Holdings was more than happy to sell it to them. Basically, Amherst sold insurance on a multiple of the notional value of the loans. Then it used the insurance proceeds to ensure that the loans were, in fact,  money good, meaning that it got to keep the difference. Foul, cried the big players.

It was the reverse of promoter Max Bialystock's bet in "The Producers," when his play was oversubscribed, meaning he had to hope for a flop. This time it was  the default event that was oversubsribed, which means that it could be averted using the proceeds of the subscription.

The big players lost the game because it was "rigged." But it was rigged according to the rules set forth by the big players themselves. A small player used leverage against them like a form of jujitsu.

Amherst was like a card counter at a blackjack table, a game that is theoretically "beatable" by a "skilled" player. There's nothing illegal about card counting, or winning using card counting.  But card counters are villified because they break the unwritten rule; that the house is supposed to win.

Now a $29 million loss isn't much for these big players. What is much bigger to them is the "insult," rather than the injury. For the reputation risk is far greater than $29 million. But having done this to others, it serves them right to be hoisted on their own petard.

No disclosures necessary.


This game should probably be shut down, for forbidding insurance to be written against more than the value of the debt itself.  But as long as it exists, it should be open to everyone. "Someone" will inevitably get hurt. But that somebody, recently, wasn't who most people were expecting.