"The Magnetar Trade: How One Hedge Fund Helped Keep the Bubble Going" MUST READ On Derivatives

[TomCADem]

NPR had a great series of interviews discussing and explaining how CDOs helped to keep the housing bubble going, which helped to magnify the impact of the eventual collapse.

http://www.propublica.org/feature/the-magnetar-trade-how-one-hedge-fund-helped-keep-the-housing-bubble-going

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 <2> <2>. 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 <3> <3>, 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.

Magnetar says it was "market neutral," meaning it would make money whether housing rose or fell. (Read their full statement. <4> <4>) Dozens of Wall Street professionals, including many who had direct dealings with Magnetar, are skeptical of that assertion. They understood the Magnetar Trade as a bet against the subprime mortgage securities market. Why else, they ask, would a hedge fund sponsor tens of billions of dollars of new CDOs at a time of rising uncertainty about housing?

[BrklynLiberal]

1. NPR and ProPublica did an outstanding job on this

[Liberal_in_LA]

2. Magnetar's name is everywhere these days

[Oregone]

3. The whole fuckn mess was designed to fail

It was designed to enslave virtually everyone. Its not enough for these pricks to be infinitely more wealthy than everyone. They want to own everyone. If its not evident by now, people have their blinders on. This whole mess has reeked to me for almost a decade

[Daphne08]

4. Fascinating. n/t