Former WSJ reporter Jesse Eisinger teamed up with author and reporter Jake Bernstein at ProPublica.org. They spent 7 months investigating a series of hedge fund trades made against subprime mortgages, CDS, etc.

The result is this thorough detailed analysis of how this took place:  The Magnetar Trade: How One Hedge Fund Helped Keep the Bubble Going (It is available at TBP Mirror)

Here’s an excerpt:

“How Magnetar pulled this off is one of the untold stories of the meltdown. Only a small group of Wall Street insiders was privy to what became known as the Magnetar Trade. Nearly all of those approached by ProPublica declined to talk on the record, fearing their careers would be hurt if they spoke publicly. But interviews with participants, e-mails, thousands of pages of documents and details about the securities that until now have not been publicly disclosed shed light on an arcane, secretive corner of Wall Street.

According to bankers and others involved, the Magnetar Trade worked this way: The hedge fund bought the riskiest portion of a kind of securities known as collateralized debt obligations — CDOs. If housing prices kept rising, this would provide a solid return for many years. But that’s not what hedge funds are after. They want outsized gains, the sooner the better, and Magnetar set itself up for a huge win: It placed bets that portions of its own deals would fail.

Along the way, it did something to enhance the chances of that happening, according to several people with direct knowledge of the deals. They say Magnetar pressed to include riskier assets in their CDOs that would make the investments more vulnerable to failure. The hedge fund acknowledges it bet against its own deals but says the majority of its short positions, as they are known on Wall Street, involved similar CDOs that it did not own. Magnetar says it never selected the assets that went into its CDOs”

The full piece is fascinating, and well worth your Sunday morning.

Also noteworthy: This is now how investigative journalism gets done in America. Its no0w about private funding of non-profit news organizations. They are insulated from ratings, news stand sales, and focus group reports.

Thank goodness ProPublica exists. They are the silver lining in the collapse of American journalism . . .

>

Source:
The Magnetar Trade: How One Hedge Fund Helped Keep the Bubble Going
by Jesse Eisinger and Jake Bernstein
ProPublica – April 9, 2010 
http://www.propublica.org/feature/the-magnetar-trade-how-one-hedge-fund-helped-keep-the-housing-bubble-going

Mirror
The Big Picture, April 11, 2010

Category: Bailouts, Credit, Derivatives, Hedge Funds, Real Estate

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

28 Responses to “The Magnetar Trade”

  1. bobmitchell says:

    It’s a great piece. The number of “no comment’s” alone make it worth your while.

  2. totekramer says:

    Although Magnetar is not to be applauded, heaping the blame upon them is misplaced. The securities they sold to the public were underwritten by major Wall Street firms. Those underwriters gave their imprimatur of quality to the CDO’s that Magnetar created. Magnetar would never have been able to sell the CDO’s if they had relied on “fly-by-night” underwriters or “bucket shops”. Clearly the underwriters were grossly negligent or mendacious. In either event, the buy-side should note the names of these firms and cease to do business with them.

    People who do business with the underwriters of crap, end up buying crap.

  3. JimRino says:

    Ritholtz, you are far too kind to “news” organizations.
    “They are insulated from ratings, news stand sales, and focus group reports.”

    They are BLATANTLY SELLING the “news” to the highest bidder, lobbyist or stock partner.
    FOX, and the Washington Times, being foreign owned, don’t answer to ANY AMERICAN.
    FOX is now the mouthpiece of the Saudi Government.
    Washington Times, insane Korean crackpot.

    Capitalism is in DIRECT Conflict with Democracy.

  4. Janet Tavakoli says:

    Hi Barry,

    I hope you are having a great weekend. Thought you might find the following perspective useful or at least interesting. I wrote about the “Magnetar” structure in my book on CDOs (2003) as applied to corporate CDOs. Contrary to many finance articles and recent books, the structure itself wasn’t new, and it wasn’t developed by Littman at Deutsche (contrary to Greg Zuckerman’s book).

    I talked the WSJ about it for an article it did on a “Magnatar” CDO called “Norma” in December 2007, “Wall Street Wizardry Amplified the Crisis.” You can find a link embedded in my recent commentary, “Goldman Sachs: Spinning Gold,” HuffPo April 7, 2010: http://www.huffingtonpost.com/janet-tavakoli/goldman-sachs-spinning-go_b_528144.html

    I also wrote about how this and other shenanigans were pulled off by several players in my book on the financial crisis DEAR MR. BUFFETT.

    One of the key people at Magnetar, David Snyderman, was in the structured products group at Citadel in August 2004 when the group asked me if I would help them with this structure for the ABS market after reading about it in my CDO book (Wiley, 2003, Chapter 6 (especially Pp. 184-194, and this information is also in the 2008 updated edition), which they said gave them the idea to apply it to the other loan markets. As I recall, Snyderman did not attend his group’s meeting on that day, but their end game was clear. My CDO book was written as a caution to investors not a handbook for guys like this. I declined to get involved. In my opinion, the investment banks that got involved in these structures should have refused to do so, too. The SEC should have shut down this kind of activity, but the SEC dropped seminal investigations into CDOs and failed to act on information in the public domain. To the best of my knowledge, Citadel got rid of the entire group and they scattered to various shops.

    Best regards,

    Janet Tavakoli

  5. Tarkus says:

    I think this was called “Arsonist taking out insurance on his mark.” Or in Wall St terms, “Making your own luck.”

    Can someone with access to the higher levels of gov’t ask “Why are there no indictments?” from this huge fraud? Is it really so complicated to pay off the inspector to stamp your dog food as filet mignon and sell it at inflated prices, meanwhile betting that people get sick eating it? Japan lost at least a decade because no one wanted to participate in a market where fraud was allowed and the same perpetrators kept running the system.

    If the Administration and Justice Dept allow this, they are condemning the nation to an empty and hollow future.

  6. cheese says:

    How the hell was Magnetar able to influence all these deals when they typically took a very small fraction of the total deal? Granted, they always took the equity……..still, for what they put up, it seems ridiculous banks went along with it.

    Take the Squared CDO for instance………a $1.1 billion deal………Magnetar committed $10million!?, and yet basically designed the portfolio? I think Yves has done a great job exposing Magnetar. She claims, and this article implies that without Magnetar…….the housing market and RMBS market would’ve only suffered an early 90s like recession. Perhaps thats true. From “Magnetar’s (Nearly) Perpetual Money Machine” ……”By buying the risky bottom slices of CDOs, Magnetar didn’t just help create more CDOs it could bet against. Since it owned a small slice of the CDO, Magnetar also received regular payments as its investments threw off income.”……….Small Slice………

    So what? Magnetar was taking what? AT MOST……10% of the deals? Probably no where NEAR that %……and yet they could design these things?

    I wonder if Magnetar even bought the most equity in those CDOs. I find it hard to comprehend that such a tiny buyer was so influential in how these deals got structured and perpetuated the market.

    What am I missing here?

  7. Janet Tavakoli says:

    I respectfully disagree with Ms. Smith’s take on the roles of the various CDO players in the market in recent years. When she was writing her book, she cold-contacted me saying she admired my work, and I directed her to my public writings. If she read them, she didn’t reference them. Neither my colleagues nor I have heard of Ms. Smith’s involvement, if any, in CDOs or credit derivatives.

    More recently, I corrected something in FT Alphaville where Ms. Smith speculated that an Abacus/Goldman deal mentioned in a Bloomberg article was one against which AIG wrote protection. (http://ftalphaville.ft.com/blog/2009/11/13/83206/synthetic-cdo-stumper/ ) It wasn’t. Moreover, that information was in the public domain if one took the time to look it up. These stories are multi-faceted and complicated, but there is a lot of bad information which doesn’t help clarify the truth of specific situations.

    The following is a link to the Magnetar / Norma article I mentioned above. (I am quoted in the article.)

    http://online.wsj.com/article/SB119871820846351717.html

    The following is an execerpt of story the WSJ did on Magnetar’s strategy on January 14, 2008 (link below). The WSJ has to work within space limitations, but it got the word out on many of the key issues, and it did a good job. There is obviously a lot more to this. I wrote about many of the structures and players in STRUCTURED FINANCE (Wiley, 2008) and DEAR MR. BUFFETT (Wiley, 2009).

    A Fund Behind Astronomical Losses
    By SERENA NG and CARRICK MOLLENKAMP
    January 14, 2008
    The trading strategy of a little-known hedge fund run by an astronomy buff contributed to billions in losses on Wall Street, even as the fund itself profited from the subprime-mortgage crisis.
    Magnetar Capital, founded in 2005 by a former star trader of Citadel Investment Group, left its mark in another way. Many of the mortgage securities that collapsed in recent months were named for stellar constellations. Magnetar, named for a neutron star with a powerful magnetic field that is a remnant of a supernova, was their common link.
    The hedge fund, run by Alec Litowitz, 41 years old, facilitated the creation of a few of the worst-performing collateralized debt obligations, or CDOs. These are giant packages of subprime-mortgage securities and derivatives that are bundled together and sold off in slices to investors around the world. The investments came with names like Orion, Aquarius, Scorpius, Carina and Sagittarius and were managed by third-party money managers. In all, roughly $30 billion of these constellation CDOs were issued from mid-2006 to mid-2007, with Magnetar as their lynchpin investor.
    Even as it helped to spawn CDOs that would later wrack Wall Street with painful losses, Magnetar, which has around $9 billion in assets, itself made a tidy profit. Its funds returned 25% across a range of stock and debt strategies last year, thanks largely to the way it hedged these trades.
    Its trading highlights the important role some hedge funds played in the great debt unwind that is now plaguing financial markets. Many hedge funds realized early on “that the loans and securities that went into CDOs were extremely toxic, and they designed structures to exploit that,” says Janet Tavakoli, a structured-finance consultant.
    Mr. Litowitz, an accomplished squash player, had been head of equity strategy at Citadel, the hedge-fund giant known for swooping in on troubled companies. At Magnetar, he recruited a former colleague, David Snyderman, who used to head credit trading at Citadel, to oversee the fund’s subprime strategy.
    In this case, Magnetar swooped in on securities that it believed could become troubled but were paying big returns. CDOs are sliced based on risk, with the riskiest pieces having the highest yield but the greatest chance of losing value. Less-risky pieces have lower yields and some pieces were once considered so safe that they paid only a bit more than a U.S. Treasury bond.
    Magnetar helped to spawn CDOs by buying the riskiest slices of the instruments, which paid returns of around 20% during good times, according to people familiar with its strategy. Back in 2006, when Magnetar began investing, these were the slices Wall Street found hardest to sell because they would be the first to lose money if subprime defaults rose.
    For the Wall Street firms underwriting the deals, selling the riskiest pieces was “critical to getting the deals done because they were designed to act as a cushion for other investors,” says Eileen Murphy, principal at Excelsior CDO Advisors LLC, a structured-finance consultancy.
    Magnetar then hedged its holdings by betting against the less-risky slices of some of these same securities as well as other CDOs, according to people familiar with its strategy. While it lost money on many of the risky slices it bought, it made far more when its hedges paid off as the market collapsed in the second half of last year.
    Click the link for the rest of the article: http://online.wsj.com/article/SB120027155742887331.html?mod=hpp_u

  8. CTX says:

    good stuff Barry

    I have a question- I really enjoyed reading your book, I found it well written and easy to follow. I dont know if you already posted what Im going to ask but I’ll ask- do you have a list of your ‘must reads’ for the recent year? in other words books that you found worth picking up? or if any readers here have a link for the data requested- post it

    ~~~

    BR: Here ya go!

    Apprenticed Investor: Reading Is Fundamental
    http://www.ritholtz.com/blog/2010/02/apprenticed-investor-reading-is-fundamental-2/

  9. Janet Tavakoli says:

    CTX

    This is my last post, but in checking whether my previous post went through, I noticed your comment.

    I am sure there was never any doubt, but it bears repeating that I am a big fan of Barry Ritholtz’s work, and highly recommend BAILOUT NATION.

    Best regards,

    Janet Tavakoli

  10. druce says:

    The Felix Salmon article on this is also worthwhile and clarifies a few things –

    http://blogs.reuters.com/felix-salmon/2010/04/09/the-magnetar-trade/

    Possibly I’m a bit slow, but reading the original ProPublica, it wasn’t super clear why Magnetar would be long and short. If you go long the equity piece of the CDO and short the market via CDS, it seems to act like an option straddle that makes money when the market is either really strong or really weak. The risky equity piece pays the cash flow for the CDS premium while the market is strong, plus you get some insight and influence on the structure of the CDO, and then when the CDO blows up, you cash in big-time on the CDS.

    It’s pretty close to The Producers’ strategy – create something that has no chance of making money, and then sell it massively short.

    History repeats itself, the first time as farce, the second as tragedy.

  11. KidDynamite says:

    blaming Magnetar for the bubble makes about as much sense as blaming Janet Tavakoli for the bubble for having written a book about the Magnetar-eqsue trading strategy – which is to say, none.

    Magnetar took advantage of the fact that the entire market wasn’t doing the work they were supposed to be doing, and they created a nearly perfect trade by taking advantage of the ignorance of the buyers of paper.

    Cheese – as to your question: imagine a vast pool of demand for AAA rated tranches of CDOs. Magnetar knew that if they ate the equity portion (which they fully expected to eventually lose on), then there would be ample demand for the higher rated tranches. Thus, Magnetar “sacrifices” their equity investment, and makes it back 10-fold by taking the other side (either by shorting CDOs, or buying CDS protection) of the higher rated tranches, which they KNEW were over-rated. The ratings agencies weren’t doing their jobs, and the buyers of the highly rated tranches weren’t doing their homework, so Magnetar was shooting the proverbial fish in the barrel.

    Magnetar figure out that the limiting factor in the equation was the willingness of investors to take the risk of the equity tranche. so they took this risk themselves, knowing that they could more than make up the eventual losses by buying protection on, or shorting, the highest rated tranches in much larger quantities (Which were much more abundant).

    the final kicker in the genius of this trade is that they got paid (on their equity portion) to wait for the blowup – so they didn’t have quite the problem Michael Burry did with perpertual sizable negative cash flows while they waited for Armageddon.

  12. michael says:

    Great read, thanks for the link Barry!

    But it doesn’t cover the CDS part of Magnetar’s deals.
    As I understand it, Magnetar was *willing* to take huge losses on all the equity tranches they bought, before in the end they were even able to unload a big part of that junk to Mizuho. The article suggests Magnetar used CDS to hedge or even overhedge the CDOs they owned, and then wanted to (and did?) win big on that.

    So who were the CDS counterparties to Magnetar???

  13. mcnet says:

    Janet,

    As you remind us you’ve written about these things often and extensively, yet a coherent picture that connects the players hasn’t fully emerged. You are uniquely positioned to make a great contribution if you seized the opportunity presented by the Magnetar publicity to connect some of your earlier work to this particular story.

    What fascinates me, and I think is new to most folks following the story is , that when you dig a tiny bit Magnetar (and others playing a similar role, i.e Cioffis group at Bear (Everquest Financial), Strategos, which is an entity of Cohen &co, TRW, etc) were critical but previously underappreciated players in all the high profile stories currently making the rounds.

    For example, Wing Chau, who plays a key role in Michael Lewis’s story, was the manager on at least 3 of the Magnetar deals, (Octans I,II, and II). That link helps to connect the dots between the hedge fund operators and their IB enablers, which I believe is an extremely significant story. Magnetar was involved in 20 something deals with the Wing Chau’s of the world. Naturally, we’re curious about the motivations that would lead respectable and gov’t backstopped IBs to crawl into bed with such folk.

    There’s much talk about regulatory capture by the banks, yet GS is currently defending itself by claining it is more captive than capturer. If GS is in fact captured by its hedge fund clients, and the regulatory apparatus is captured by the IBs, then the focus of investigative reporting needs to shift to the IB clients.

    As you point out, perhaps Magnetars stucture wasn’t new. So what. It was material, and replicated with harmful effect by others. If these programs were important drivers behind the devastating externalities we’re paying for, then I’m glad to know it.

    PS bitch slapping Yves . Ouch! Are you kidding?

  14. vachon says:

    Thanks. I linked to the PB article on my Facebook page. I wish I had friends who understood and followed this stuff like I do. *sigh*

  15. Janet Tavakoli says:

    Kid,

    I just got a heads up on your post, so I will leave a final comment. You wrote: “Magnetar knew that if they ate the equity portion (which they fully expected to eventually lose on)…”

    Among other things that I wrote about is an equity structure that has more access to cash flows and is more protected than the “super senior,” and you fully expect to get all your money back and more. CDOs can be structured–and gamed–in a variety of ways.

    Depending on their involvement with the structuring process, hedge funds may or may not be off the hook. A couple of names leap to mind that don’t include Magnetar, and I mention a couple in a chapter in DEAR MR. BUFFETT (“Beware of Geeks Bearing Grifts”). This may shake out in ways participants didn’t expect when they took bad advice from their lawyers.

    I agree with you that to say that hedge funds inflated the bubble when the network of culpable mortgage lenders and underwriters (those most responsible for the structures), rating agencies, lax regulators, etc…is to get the cause and effect wrong. The number of things that went on was complex (with mulitple types of structured finance structures), which is why I wrote books about it and won’t go on at length here.

    As to who was on the other side, that is complex too, since loss-making deals were stuffed into a variety of CDS counterparties, total return swaps, CDOs, CDO-squared (cubed, more), SIVs, and so on.

  16. Janet Tavakoli says:

    MCNET,

    In replying to Kid, I saw your comment. What makes you think I didn’t write a book connecting the dots? I did. Two as a matter of fact. It’s DEAR MR. BUFFETT (Wiley, 2009). I mention the HF managers, Cioffi, Everquest, CDO managers and much more). Senator Kaufman’s office has the book among others. [For pros, its STRUCTURED FINANCE with more technical details]

    For example, I pointed out the FCIC staffers the link between Citigroup, its credit line, its CDOs (and others banks’ CDOs), BSAM’s hedge funds and the implosion of the hedge funds and Bear Stears’ peril in DEAR MR. BUFFETT, so there was no excuse for their missing it in last week’s Citigroup hearings as I explain here: http://www.huffingtonpost.com/janet-tavakoli/congresss-fcic-nearly-nai_b_530341.html

    I’m not leaving further comments on Big Picture, but if you are interested, my recent public commentaries are on http://www.tavakolistructuredfinancelcom/press

  17. Richard Smith says:

    Remarkably unscrupulous smear of Ms Smith by Ms Tavakoli. I particularly enjoyed this bit:

    “More recently, I corrected something in FT Alphaville where Ms. Smith speculated that an Abacus/Goldman deal mentioned in a Bloomberg article was one against which AIG wrote protection. (http://ftalphaville.ft.com/blog/2009/11/13/83206/synthetic-cdo-stumper/ ) It wasn’t. Moreover, that information was in the public domain if one took the time to look it up. ”

    1. Ms Smith does not speculate about AIG’s involvement in the specific Abacus deals mentioned in the Bloomberg article. You can check this by clicking through to the Smith blogpost. An error in an FT Alphaville article puts Ms Smith’s scholarship in question? How?

    2. Then it turns out that the comment by Ms Tavakoli on the Alphaville article does not correct Ms Smith’s speculation anyway. You can check this by reading Ms Tavakoli’s comment.

    3. Ms Tavakoli doesn’t provide her public domain source for the info on the Abacus CDOs.

    “These stories are multi-faceted and complicated, but there is a lot of bad information which doesn’t help clarify the truth of specific situations.”

    This part of Ms Tavakoli’s comment is true. Unfortunately the rest of the paragraph is a good example of the bad information she affects to deplore.

  18. Janet Tavakoli says:

    MCNET,

    Whoops, I left this off the last post. You wrote: “GS is currently defending itself by claining it is more captive than capturer. If GS is in fact captured by its hedge fund clients, and the regulatory apparatus is captured by the IBs, then the focus of investigative reporting needs to shift to the IB clients.”

    As I mentioned, the story is complicated, and Goldman is spinning a story. I explain my position here, but the basis for this argument and a lot of background information is built up in DEAR MR. BUFFETT. Included is the effect on CDS counterparties (FGIC, AIG, MBIA, Ambac and more), auction rate preferred, the muni bond market, and more.

    “Goldman Sachs: Spinning Gold,” HuffPo April 7, 2010: http://www.huffingtonpost.com/janet-tavakoli/goldman-sachs-spinning-go_b_528144.html

    As I also mentioned, it is too time consuming to respond to comments, but I noticed Barry highlighed this–and I like Barry–so I spent some time here today on this.

  19. cheese says:

    What I find curious is……ok…….on the Squared CDO with JPM……….Magnetar puts up a measly $10 mil for an equity tranche. JPM booked $20 mil in fees! So, if the 1% of equity was all that was standing in the way of these deals……..JPM, or any other bank……could’ve eaten that, and booked $10 million in net fees.

    I find it hard to believe that banks could place a billion dollars no problem……….but had a hard time placing that last 1%?

    Basically, what I’m getting at is how did the banks not see they were being gamed by these guys? Magnetar structures the portfolio………..the banks bend over backward to accommodate them……….And deal after deal………..Magnetar wants more “spread”?! And nobody thought twice about accommodating them? Turns out very few did. Wall St. wanted these deals. 10 million on a 1 billion deal was a roadblock?

    So, with the demand from the banks to deal with Magnetar………..even after home prices had peaked……………..they could’ve found a home for that 1% tranche without Magnetar. Or, as I alluded to above – they could’ve eaten it – booked a loss on the entire tranche, and still make a profit.

  20. Janet Tavakoli says:

    I was just alerted that I should respond to Mr. Richard Smith. You couldn’t find my response, because you weren’t looking at my follow-up, but at the original post. The link to my follow-up is shown below. You seem to doubt me when I say the information was public, and a link to it can be found within the information below.

    This was FT Alphaville http://ftalphaville.ft.com/blog/2009/11/13/83206/synthetic-cdo-stumper/ This commentary at Naked Capitalism does suggest that AIG may be the insurer of interest: http://www.nakedcapitalism.com/2009/11/goldman-gives-preferential-treatment-to-junior-cdo-holders-over-senior.html. FT Alphaville seemed to get that idea and lumped it in with the Bloomberg story. Since CDO issues are both deal (portfolio) specific and structure specific, one cannot generalize, and one has to look at each particular deal.

    My response in FT Alphaville is here. The actual Abacus deal names for AIG’s involvement were in the public domain. Goldman did indeed insure specific Abacus deals, but not the one mentioned in the Bloomberg article. The public information was is the Cassano memo which I mention in my commentary. FT Alphville has the link to my November 10, 2009 Goldman/AIG commentary here, and the embedded link to the Cassano memo is also within (http://www.tavakolistructuredfinance.com/GS3.pdf ). My commentary predates the Bloomberg article:

    http://ftalphaville.ft.com/blog/2009/11/16/83386/weird-waterfalls-and-the-synthetic-cdo-stumper-part-deux/

    My November 10, 2009 commentary predated the November 17 SIGTARP report and was the first information in the public domain about SocGen, Calyon and others purchasing CDOs underwritten by Goldman and insuring them with AIG. As I also mentioned, the synthetic Abacus deals are mentioned in the Cassano memo which is linked to within the commentary.

    I believe my point is a valid one, and I sorry if you don’t see it that way.

  21. Patrick Neid says:

    Oh god, the Sandlers again.

  22. Richard Smith says:

    Yes Janet, caught you. This is the wholly unjustified criticism of Smith on which I called you out:

    “Neither my colleagues nor I have heard of Ms. Smith’s involvement, if any, in CDOs or credit derivatives.

    More recently, I corrected something in FT Alphaville where Ms. Smith speculated that an Abacus/Goldman deal mentioned in a Bloomberg article was one against which AIG wrote protection. (http://ftalphaville.ft.com/blog/2009/11/13/83206/synthetic-cdo-stumper/ ) It wasn’t. Moreover, that information was in the public domain if one took the time to look it up.”

    Now it seems to me that the point of this comment of yours is to impugn Smith’s expertise and scholarship. Let’s see how it goes when you try to back that up. First, you again attempt to conflate the Alphaville, Bloomberg and Naked Capitalism stories:

    “This commentary at Naked Capitalism does suggest that AIG may be the insurer of interest: http://www.nakedcapitalism.com/2009/11/goldman-gives-preferential-treatment-to-junior-cdo-holders-over-senior.html.”

    But one just has to read the above post to realise that NC is *not* necessarily claiming that AIG insured the Bloomberg deals that were the subject of the Alphaville post. So next, you presumably perform that elementary fact check, gulp a bit, and cave in, here:

    “FT Alphaville seemed to get that idea and lumped it in with the Bloomberg story.”

    That’s right, FT AV, not Smith. Which was my point.

  23. Patrick Neid says:

    The more I think about it this whole ProPublica piece it smells like propaganda. The entire story was written in complete detail over two years ago in the WSJand on several blogs.

    “How Magnetar pulled this off is one of the untold stories of the meltdown.” What a bunch of bunk. Alec Litowitz even gave interviews if I recall on how he pulled it off.

    If agenda driven ProPublica, hiding behind a non profit front, is to save journalism we are really in bad shape.

  24. cheese says:

    I kinda agree with Neid………don’t know about out and out propaganda………..but, I think I’ve made my opinion known……….

    I searched twitter for “magnetar”………obviously a bunch of links to the pro publica piece……..but, there was a good bit of rage at Magnetar.

    I mean the banks and credit card companies have been gaming us for how long?……..

    Here we have a story that tries to paint the banks as the victim. I can hear them now………”Oh………if it weren’t for this gigantic (1.7Bln$?????HA!) hedge fund…………we’d have only suffered mild losses…., we wouldn’t have the need to rob the taxpayers at all………” YES! It was all Magnetar’s fault!

    If anything……………..people should be happy that somebody finally used the banks’ greed against them!

    The fact that we are paying for it isn’t Magnetar’s fault………….ITS OURS!

  25. Bokolis says:

    That’s why they don’t let baseball players bet on baseball games. I mean, if MLB had this rule in place during its really shady days, what is the Wall Street apparatus’ excuse?

  26. Janet Tavakoli says:

    To Smith above. I stand behind all of my comments. I may not have been clear, so let me be clear now. I agree with FT Alphaville’s initial interpretation of what Yves Smith wrote. It suggests to me that she was speculating that AIG was the counterparty. Given the way it was written, it seems to me to be a reasonable interpretation. If Smith feels that is not what she meant, but the interpretation does not strike me in any way unfair. As I say, there was public information that could have identified all of AIG’s specific Abacus deals, and none of the Abacus deals mentioned in the Bloomberg article were among them.

    It is also the case that neither I nor my colleagues are aware of any transactions in the CDO markets or credit derivatives markets with which Ms. Smith has been involved. That is a statement of fact. We simply are not aware of any. I never heard of her until I got an email from her. Things look different when one is interpreting events from the outside with less access to information. It is my opinion that her interpretation of Magnetar’s role is incorrect.

    I enjoyed reading the comments of others about the banks, the misplaced focus on Magnetar, and ProPublica’s lateness to the game above. I agree that the ire directed against Magnetar takes the focus off of the key issues, and that must be delightful to Citigroup’s officers that faced the FCIC last week and to Goldman since it issued its shareholder letter last week. Goldman wrote a Hogan’s Heroes kind of excuse; it was just following (“customers”) orders.

    There is nothing more for me to say other than I should have stayed out of Barry’s real estate, and I stand behind my comments.

  27. inthewoods says:

    Kid wrote: “Magnetar took advantage of the fact that the entire market wasn’t doing the work they were supposed to be doing, and they created a nearly perfect trade by taking advantage of the ignorance of the buyers of paper.”

    I think you’re letting the bankers off the hook – I think it is equally possible that the bankers knew exactly what was going on, but instead focused on collecting the fees on the CDOs knowing full well that they would be paid a bonus prior to the reckoning.

  28. [...] like another Magnetar type story: SEC Charges Goldman Sachs With Fraud in Structuring and Marketing of CDO Tied to [...]