Fri, Jul 3, 2015
A A A
Welcome Guest
Free Trial RSS
Get FREE trial access to our award winning publications
Industry Updates

Report: The Magnetar Trade helped keep 2008 bubble going

Monday, April 12, 2010
Opalesque Industry Update: A comprehensive report by ProPublica.org 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 ProPublica.org 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, Businessinsider.com 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 Businessinder.com 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

Bg

What do you think?

   Use "anonymous" as my name    |   Alert me via email on new comments   |   
Today's Exclusives Today's Other Voices More Exclusives
Previous Opalesque Exclusives                                  
More Other Voices
Previous Other Voices                                               
Access Alternative Market Briefing


  • Top Forwarded
  • Top Tracked
  • Top Searched
  1. Opalesque Exclusive: New systematic strategy managed alongside research firm outperforms S&P500[more]

    Benedicte Gravrand, Opalesque Geneva for New Managers: An emerging CTA manager explains how he runs his strategy, which is based on an index produced by a research firm. Peter Turk is head of

  2. Opalesque Exclusive: New systematic strategy embraces machine learning[more]

    Benedicte Gravrand, Opalesque Geneva for New Managers: The founder of a New York-based systematic trading firm, which offers a hybrid between alpha strategies and alternative feta at lower fees, describes his approa

  3. Larry Robbins' hedge fund Glenview buys 1m Tenet Healthcare shares[more]

    Komfie Manalo, Opalesque Asia: Glenview Capital Management said it bought an additional 979,482 shares at Tenet Healthcare Corp valued at $53.80 million, raising its stakes in the healthcare services company to 15.16%, reported

  4. Legal - Grayson’s hedge funds under scrutiny for possible ethics violations, Court rejects hedge fund’s motion to block merger of Samsung affiliates[more]

    Grayson’s hedge funds under scrutiny for possible ethics violations From Freebeacon.com: Rep. Alan Grayson is finding himself in hot water over managing hedge funds that bear his name, actions that are in possible violation of House ethics rules. Sitting members of Congress are prohibite

  5. Hedge funds panic over Greece[more]

    Komfie Manalo, Opalesque Asia: Some investors are in panic mode as Greek Prime Minister Alexis Tsipras announced Sunday night that the banks and the stock market would be closed Monday, said

 

banner