December 20, 2007
The Once-in-a-lifetime, Low-risk, Incredibly High-reward Scenario
Bass Shorted `God I Hope You’re Wrong’ Wall Street, by Mark Pittman
“Bass and Fournier focused on single-name mortgage bond derivatives to be more certain that their bets were right. Both bought only securities rated BBB and BBB-, rather than AAA rated securities, expecting them to pay off more quickly.
Bass says he raised about $110 million and used the leveraging effect of derivatives to sell short about $1.2 billion of subprime securities. Two-thirds of it was based on BBB rated mortgage instruments. The remaining third of Bass’s investment involved securities rated one grade lower, BBB-.
An index designed to be a proxy for the lowest investment-grade subprime mortgage bonds sold in the second half of 2005, the ABX-HE-BBB- 06-01, traded as high as 102.19 cents on the dollar when it started in January 2006 and today trades at about 30 cents on the dollar.”
I think a lot of people probably saw what was coming, but they weren’t able to raise $110 million fast, like Bass. It takes money to make money, baby.
December 20th, 2007 at 5:20 pm
Sure, but there is so much money floating around, and how many funds and individuals (with access to liquidity) have shorted these credit derivatives? It is not so much about money than about the right time frame (and guts for sure).
Markus
December 20th, 2007 at 7:58 pm
Markus: True, but Joe Schmo could have seen things very clearly, been totally gutsy, and made around $20K by putting all his money (say two grand) at risk. :-)