Betting on Failure: Profiting from Defaults on Subprime Mortgages Harvard Case Solution & Analysis

Betting on Failure: Profiting from Defaults on Subprime Mortgages Case Solution


During the financial crisis in October 2008, Anthony Keating, the investment manager at the Boston private banks, Billingsley, Blaylock, and Montgomery, was invest gating for a speculation technique to prescribe to his high-total assets customers.

Conventional interests in the value markets were being negatively affected, and Keating's customers tend to seek his ideas. Driven by the accomplishment of Paulson and Co., Keating started investigating the likelihood of entering an exchange that would benefit as property holders defaulted on their home loans.

Moreover, Keating found out regarding the exchange, the more he understood that he expected to think about home loan backed by the securities and the credit default swaps. Therefore, the objective of the case is to come up with the opportunities related to financial instruments, as well as providing solutions to investing in the value interested or real estate financing.

The problem:

CDS has turned out to be a piece of the dictionary of the financial crisis after the burst of Enron, and where the mortgaged backed securities were used. The company faced sudden increase in the prices inthe market driven by home loan securitization. Therefore, he wanted to use the strategy of buying credit default swap (CDS) and protection on the subprime mortgages bonds (MBS) because it was considered as the big profit generation technique on the subprime backed mortgages.

Qualitative Analysis:

The Greatest Trade Ever by Gregory Zuckerman and John Paulson's shows a contrarian view on subprime contracts, which brought about one of the biggest adjustments in financial history. Paulson's exchange misused poor validating principles in an overextended contract market driven by home loan securitization. (ZUCKERMAN, 2015)

Paulson's bet against subprime contracts by the means of credit default swaps isknown asthe best exchange ever by Wall Street Journal as statedby Gregory Zuckerman This report attests a comparative opportunity, however with the means of an alternate system, it is shaping in the Canadian home loan market.

On the other hand,the United States’ contract business sector was driven by subprime securitization and poor underwriting models . The Canadian home loan business sector wasdriven by the collaboration and codependency of managerial regulatory norms, government supported home loan, safety net providers and the extension of home loan credit in low cost.

These conditions have brought about a demand of high loan to value (LTV) contracts in the Canadian home loan market, which has surpassed the peak centralization of high LTV contracts in the United States’ contract market prior to the subprime emergency.(LEWIS, 2010).

Home mortgages are securitized into financial instruments which are traded in the public market:

The main reason to securitize mortgages in the financial instruments is to provide high level of liquidity and capital in the market.

Securitization includes the pooling of home loans in a unique purpose vehicle, which is basically an organization enrolled in what is typically an expensive safe-house.

Securitization allows originators to earn salary from their validating exercises without abandoning themselves after being presented to credit, business sector, or liquidity risks since they offer loan to that market where they generate more income.(Wang, 2014)

These securities are bought by institutional financial specialists, affluent people, and the depository institutions themselves. The securitization procedure proliferates the business sector hazard, offers storehouse foundations a more fluid class of credit resources, and taps the profound wellsprings of capital for the home loan market. (Dwyer, 2010)

The mortgaged backed securities market reduce market risk and not just from the balance reports of MBS, for example, banks.

Therefore, it is observed that the company should follow speculate following strategy in order to escape from the rise of subprime mortgage. The strategy includes;(Crisis, 2007)...........................

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