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Report: The Magnetar Trade helped keep 2008 bubble going

Monday, April 12, 2010
Opalesque Industry Update: A comprehensive report by on Friday detailed one of the untold stories that pushed the biggest economic meltdown (of 2008 to early 2009) since the Great Depression and traced it to what is now known as the Magnetar Trade.

In a nutshell, the report said that the Chicago-based market-neutral hedge fund, with the help of nearly every Wall Street banks, helped create $40bn worth of extremely toxic collateralized debt obligations (CDOs) after housing prices began to show decline in late 2006.

Magnetar bought the riskiest portion of CDOs and placed bets that its own deals would fail.

Indeed, several people told that 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 involved similar CDOs that it did not own. Magnetar says it never selected the assets that went into its CDOs.

The report identified nine banks, including Merrill Lynch, Citigroup, UBS and JPMorgan Chase which helped Magnetar to pull off the stunt. It said that most of the bankers who worked with Magnetar personally benefited from the deal and earned millions in annual bonuses. But the banks that assembled and marketed the Magnetar CDOs were the biggest losers when the crash came as they were not able to sell the CDOs.

Nothing illegal
Magnetar did nothing illegal, the report said. And it did not cause the housing bubble or the financial crisis. But the trade illustrates the reckless behavior that typifies the last days of the boom.

If not Magnetar, other Wall Street geniuses would have created mortgage CDOs which would eventually have become worthless, said .

Bankers don’t have a clue crisis was forthcoming
At last week’s U.S. Congress hearing by the Financial Crisis Inquiry Commission, mortgage bankers who testified said none of them foresaw the impending sub-prime mortgage failure, nor the financial crisis that followed. While many may find that hard to believe, some experts said the bankers may be speaking the truth.

A separate a report by said that had Magnetar foreseen the crisis coming, the hedge fund would have shorted Citigroup or other banks which crashed, because that would have required far less work and bigger profit.

It said that Magnetar and the bankers who helped the firm were just looking for a leveraged way to gamble against housing by betting on the riskiest slices of the market. – Precy Dumlao


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