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.