Tongues were wagging in financial circles around the world last week regarding this Wall Street Journal article about Austin-based Amherst Holdings’ amazing play in which they sold credit default swaps on mortgage bonds to a number of Wall Street and London’s biggest banks. Amherst then turned around and bought the mortgages underlying the bonds upon which the CDS were written to prevent a default that would have triggered Amherst’s obligation to pay on the CDS.

Thus, in short, Amherst sold CDS on bonds and then bought the security for the bonds, thereby rendering the CDS worthless. Although the amount of profit is somewhat unclear, Amherst reportedly pocketed tens of millions of dollars on the deal.

The Financial Times’ economist Willem Buiter does an entertaining job of explaining Amherst’s transactional plan in the context of gambling and the difficulties involved in regulating such transactions. In so doing, he makes the following observation:

"The scheme is beautiful in its simplicity, absolutely outrageous, quite unethical, deeply deceptive and duplicitous, indeed quite immoral, but apparently legal."

Geez, maybe these Amherst sharpies could have saved AIG?