Royal Bank of Scotland, JP Morgan and Bank of America are among Wall Street banks who are reported to have been outwitted by a small broking firm in the sub-prime mortgage market.

Texan broking firm Amherst Holdings is said by the Wall Street Journal to have forced big Wall Street banks into losses of tens of millions of dollars when they believed they were on to sure-fire profits.

The big banks have complained to their trade bodies but have balked at taking legal action at a time when regulators are considering massive changes to the largely unregulated derivatives market.

The trade involved $29 million (£17.6 million) of securities which were backed by sub-prime mortgages. The big banks believed that these were almost worthless and so bought credit-default swaps based on them. These effectively act like an insurance policy paying out if the securities become worthless.

Traders for JP Morgan are reported to have paid between 80 cents and 90 cents in the dollar for the credit-default swaps betting that they would get a dollar back. Royal Bank of Scotland and Bank of America also bought some of the credit-default swaps. Up to $130 million of bets were taken against the original $29 million of securities.

But somehow Amherst engineered that the underlying loans were paid off and the bonds repaid. That made the insurance worthless and all bets were off.

Amherst says it did nothing wrong.