JPM and Goldman Sachs were fleeced by a company in Texas. What if this happens on a larger scale?
Here’s what happened:
1) Homewowners defaulted on mortgages, so there was less money to pay the bonds based on the loan in the pool.
2) JPM, Goldman, and others made huge bets (by purchasing CDS’s) that the rest of the bonds would default as well. Amherst Securites Group sold them the CDSs.
3) Amherst bought the loans and paid the bonds, so all of the CDS (which pay out if a bond defaults) became worthless.
What if this happens again on larger set of bonds? (This was a small bond pool).
Here’s the link