This should set some alarm bells ringing:

A dispute between UBS and a hedge fund that sold it protection on a complicated mortgage security highlights why banks are still having a hard time figuring out the total amount by which they will have to write down such debt.

UBS asked Paramax Capital International to sell it protection on $1.3bn of the most highly rated slices of a CDO made up of subprime residential mortgages that the UBS investment bank underwrote.
…
Paramax claims that, from the beginning, the UBS hedge was cosmetic. In May 2007, when the original agreement was signed, the terms were a fraction of the market rate. Also, Paramax had only $200m under management and its agreements with its own investors limited it to commit no more than $40m to any single deal. Thus, it could never compensate UBS fully for any meaningful loss in value of the $1.3bn UBS was trying to insure, it claims.

Paramax also claims that UBS told it that the bank would employ “subjective valuation methodologies” that meant it would not record any loss in value that could trigger calls for additional margin from Paramax. (Because credit derivatives contracts are individually tailored agreements rather than standardised documents, in fact there is some discretion in how firms value such deals.) Paramax also claims that UBS promised that if the lender needed a “real” hedge, it would tear up the agreement.
Now UBS is taking Paramax to court, seeking to compel it to pay up as the securities drop in value, alleging breach of contract. Paramax in turn is charging UBS with negligent misrepresentation.

Good point. I should have figured that out…

…”were supposed to be buying good assets”

From whose point of view? Then, as now, these “engineers” sought out the junk, often helped create the junk, then packaged it and sterilized it, knowing full well that it would blow up and they would go in buy it up again from the suckers that bought it.

You wouldn’t want to invest with them, I’m sure, nor would I, but those who care little about the fallout will definitely want another round with the smart guys.