Jesse Eisinger and Jake Bernstein of ProPublica just published an exhaustive narrative on what has become known on Wall Street as the Magnetar trade.
We won’t ruin it for you, but basically the giant Chicago hedge fund, started by former Citadel trader Alec Litowitz (left), helped create $40 billion worth of extremely toxic CDOs after housing prices began to slide in late 2006. With the help of nearly every bank of Wall Street those CDOs were sold to other investors.
But, at the same time, Magnetar was betting the CDOs would default, and they ended up reaping a fortune.
From what we’ve learned, there was nothing illegal in what Magnetar did; it was playing by the rules in place at the time. And the hedge fund didn’t cause the housing bubble or the financial crisis. But the Magnetar Trade does illustrate the perverse incentives and reckless behavior that characterized the last days of the boom.
As far as Magnetar is concerned, they did nothing wrong and their bets against the CDOs were mere hedges.
Eh, read through their response and some other docs, just from that (caveat) looks kosher to me, but wtf do I know.
Is it bad that I initially read the title as “The Secretary Behind the Infamous Magnetar Trade” and my mind jumped to what people around here are known to do to their secretary’s behind?
Genius trade, but surprising that Magnetar (and Scion Capital) underperformed John Paulson by nearly a factor of 10, and all were involved in basically the same trade..
@1/AnalDude “wtf do I know”
But that doesn’t stop you from offering your f*cking opinion on every topic under the sun, does it?
“but wtf do I know” Nothing, from what any of us can tell.
Anal is suffering from over exposing his anus.
Alec is a wannabe douchebag…..Magnetar has been an enormous failure. Alec is a parasite living off of 3+% management fees.
Alec will never get caught because he pumps money into this shady bastard’s pocket
http://www.newsmeat.com/fec/bystate_detail.php?last=Litowitz&first=Alec
This is an outrage!
- Plebe
I see nothing wrong with the Magnetar Trade other than it wasn’t named after a “Star Wars” theme.
~A. Fastow
The Raptors, TX
Anal_yst @1,
Any thoughts about overexposing your anus, being an ignoramus, offering your idiotic thoughts, and generally being a moron?
@analyst
Great job reaching the same conclusion that the authors stated in the excerpt included in this post.
Keep up the mastery of the dealbreaker message board
Shut the fuck up Kouwe
In equally scandalous news, Magnetar reportedly went long GM while AT THE SAME TIME shorting the automakers. Did you hear that? At the VERY SAME TIME! Then, to finish their dastardly deed, they bought out of the money puts, claiming it would “help them stop a loss if the value dropped.”
Those bastards.
@14 and the rest of the self-righteous pricks that constantly feel the need to justify everything wall st has done because otherwise they wouldn’t be able to feel the same sense of entitlement to an oversized pay package:
The whole point of the article is that all of this was legal, or “kosher” as anal_yst put it. The point is that the system is messed up and that Magnetar was able to generate profits while creating instruments that destoryed a shit ton of wealth. Yes, they figured out how to arbitrage the structure of some CDOs. Yes, this was legal and kosher. But this also perpetuated a horrible market that destroyed a lot of weatlth. That is the point. Christ, this is why wall st is so messed up. Intellectual midgets like 14 who can’t comprehend anything and just get defensive anytime the conclusion of anyones thought process might be that people shouldn’t be gettting paid as much on teh street.
I think people should be getting paid as much on teh street.
Legal and “kosher” (whatever you mean by that) they may have been. But were they ethical, socially conscious, practicing good citizenship, putting community first, doing right by their nation, acting faithfully, or honorable?
Not in my opinion! And for that, these people will forever be pariahs in my book.
God or mammon – it’s a choice we all face. Even if you don’t believe.
@15 fuck off.
I wonder if you would have the same view of this if the world had found that the governments of China, Abu Dhabi and Singapore had been the ones left standing when the music stopped.
I imagine there’d be more unanimous support for free markets then.
Haven’t you realised that the wealth that was destroyed by the crisis was an illusion in the first place? Did you actually believe the world was running out of plots of land so rapidly ?? And that your pension would be paid for by assuming that stocks would go up forever?
So please. Fuck off.
Twit @15 –
So your shockingly original thought is that “they” are “getting paid too much” and “we” should somehow “fix that.”
Right. Move along folks, nothing to see here.
By the way dude, close the E*Trade account. Go to Vegas. Same game, but the odds are slightly better, the rules are simpler, the girls are prettier, and you get free drinks while you play.
Love,
14
Anal_yst,
Are you an Anal_yst or a Hair_stylist?
http://answers.yahoo.com/my/qa/index;_ylt=AmAwTwnWRQzU.Z3CczS9xtLsy6IX;_ylv=3?link=answer&more=y&show=3CMZWDJIaa
Can somebody (maybe Anal_yst) please fill me in on the anti Anal_yst stalker(s)? I’ve seen Anal_yst be a consistent poster to a well-read blog. Nothing that would seem to invite the level of ire and snark being directed toward him.
Just curious – I’ve got no dog in the fight.
“went long GM while AT THE SAME TIME shorting the automakers”
That didn’t even make any sense.
@22 – that must be hard for you.
Sounds like insuring the house before you burn it. It’sbad insurance when the premiums can’t cover the loses. Either the issuing company did a poor job or someone was stretching the truth about values of the investments. It sure sounds like Magnetar knew exactly what was happening.
this is crazy
A hedge fund literally hedged. Banks creating stupid products at the behest of a hedge fund. Lutherans buying said stupid product and losing everything. That’s totally shocking.
Given the general nonsense of people buying $350K homes on $35K income, nothing down, we should hardly be surprised at someone (large banks, hedge funds) exploiting that feeding frenzy to the fullest.
To think otherwise is to suggest sharks would avoid the blood in the water and not swarm in for the kill. Don’t bleed in the water.
http://www.thestreetsweeper.org/undersurveillance.html?i=350
Let’s not forget Zach has a history of writing stories to pump his hedge fund sources trades. Someone should take a look at his relationship with AbMac and the reporting he did on WAMU and the PE fund that investied in it while he was writing for the NY Post in 2008.
mmm toxic
@1 & @4 – the facts don’t matter to anal_yst, he just makes negative rants regardless of facts, he’s wrong at least 50% of the time but that has never stopped him. He’s a regular here, if you’re new you wouldn’t know though
@ 11 – picking on anal_yst because of his choice of username is childish and stupid. He’s not going to change his username because you are fixated with the word “anal” or “anus” because you’re possibly a heterosexual with “sexual orientation issues.” Berate anal_yst him because his opinions are never based on facts – that’s legitimate because it’s true. But come on, name-calling?
@21 – sure – you’re obviously not reading all of anal_ysts’s posts (perhaps go back in time because he has become more polite due to unsolicited “feedback”). If you make it your habit to read each and every comment he makes, you’ll understand why people on DB are getting fed up with his baseless assumptions and unfair negative rants (most of them are). Check out his website too, it’s full of that kind of stuff. Anyway, he deserves it all because he reaps what he sows or whatever that stupid expression is.
CDOs tanked because middle class people who bought too much house couldn’t pay their mortgage. The gov encouraged banks to not discriminate based on socioeconomic status and other prohibited factors, so home ownership rose and but some couldn’t afford 1 large home or 2 homes. Had the middle class not been so greedy or understood how to manage a budget, CDOs would have been fine income instruments.
Wonder who the counterparties were on the credit default swaps were. Not AIG surely or that would raise another stink.
@31- I like the cut of your jib, sailor.
I would do a trade if;
A. Its legal even not ethical
B. Its ethical even not legal
And one day I want to trade CDS for Phoenix partners group
Hotline
@31 – So good to hear from you sir, I trust we’ll have both lobster and crab for lunch again?
leave anal_yst alone… blame is on AAPL for providing him with the iPhone. SJ should get three consecutive life sentences for creating weapons of mass distraction.
So . . . let me get this right. You are a hedge fund. You know (a) that CDO equity trades at a steepening discount, and (b) you can buy insurance against it for full notional value. So . . . if it doesn’t blow up, you’ve got high-yielding paper that is yielding even higher due to your discounted purchase price. If it does blow up, you get (CP risk aside) more than your original investment back. You can use the high CF to fund your insurance premiums, without significantly diminishing your yield.
You announce you’ll do that trade every day, people start beating down your door with product. There’s noting illegal or immoral about that. It’s pretty damn smart.
Next step- the “influence” argument. If you walk into a Chevy dealer and announce you’ll buy every lime-green astro van they can get their hands on, have you influenced that dealer’s inventory? Have you influenced the production line? Possibly. In untoward ways? Hmmmmm . . .
So, again, you tell the sellers that you want the riskiest of the risky CDO equity tranches for this trade, and you have lots of money. Have you then “created” or “influenced the creation” of riskier CDOs? I guess possibly. In untoward ways? Hmmmmm.
In any case, the salacious BS in the (really long and boring) article aside, the fact is that there’s nothing here, despite their being a “big bad hedge fund” which it is still, I think, still legal to be. For now.
@7 — where can I sign up for the gig of being a parasite living off of 3+% management fees? Do I need a prior track record or a CFA Level 3 will be enough?
@31
Got any specifics, champ? @38 hit the nail on the head, btw.
@32 – please, please everyone let’s understand – CDOs are NOT equal to subprime / mortgage crisis. A CDO is a Collateralized Debt Obligation – which is a Debt Obligation backed by Collateral. In the case of a subprime CDO, the Collateral is subprime mortgage.
But CDO’s are simply securitizations, which are methods of financing something – anything. The subprime bond deals are a small subset of “CDO”s, not the other way around.
So it was not illegal for S&P and Fitch to rate the clearly toxic funds triple A? Blaming “stupid investors” for buying funds that were intentionally created to fail let’s them off the hook? Blame the victim-thats a great strategy. Now tell me how it’s just fine that Sachs putting Greece’s liabilities off the books was fine.
I stumbled on this site. How bizarre the apologists are.
While not illegal (yet), it was reckless and he knew that people would suffer. Laws are not the only thing that should guide a person to do the right thing in life. This represents everything wrong with capitalism in the extreme form. Don’t get me wrong I am a capitalist, but I am smart enough to know that we all have a moral responsibility which defines our character which is something money cannot buy. Alec will rot in hell for what he did soon enough.