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Amherst's Laurie Goodman on Cleanup Calls

By Anonymous

Amherst Holdings, if you'll remember, is the Texas brokerage that duped the big Wall Street banks by (somehow) arranging for the servicer on several subprime MBS to exercise its "cleanup call" provisions, much to the banks' surprise. Exercising the cleanup calls essentially made the CDS contracts on the subprime MBS that the banks had bought from Amherst worthless.

Amherst has been poaching talent from Wall Street recently, and its most prominent hire was probably Laurie Goodman, the former UBS fixed income analyst and well-known mortgage securitization expert. As it happens, Goodman is also the co-author of Subprime Mortgage Credit Derivatives, one of the ubiquitous Wiley Finance reference books.

Ironically, a footnote on page 222 says:

Modeling the call is an interesting topic, as [cleanup] calls have historically not been exercised in an economically ?ruthless? manner.

Until now.

Maybe Goodman just wanted a data point for her model. In fact, until proven otherwise, I'm going to assume that was the real reason Amherst put on the trades. Goodman wanted a slightly more robust model. Models strike again!

Full post as published by Economics of Contempt on June 27, 2009 (boomark / email).