Some bankers involved in the Magnetar Trade now regret what they did. We showed one of the many people fired as a result of the CDO collapse a list of unusually risky mortgage bonds included in a Magnetar deal he had worked on. The deal was a disaster. He shook his head at being reminded of the details and said: "After looking at this, I deserved to lose my job."
Magnetar wasn't the only market player to come up with clever ways to bet against housing. Many articles and books, including a bestseller by Michael Lewis [9], have recounted how a few investors saw trouble coming and bet big. Such short bets can be helpful; they can serve as a counterweight to manias and keep bubbles from expanding.
Magnetar's approach had the opposite effect — by helping create investments it also bet against, the hedge fund was actually fueling the market. Magnetar wasn't alone in that: A few other hedge funds also created CDOs they bet against. And, as The New York Times has reported, Goldman Sachs did too. But Magnetar industrialized the process, creating more and bigger CDOs.
Several journalists have alluded to the Magnetar Trade in recent years, but until now none has assembled a full narrative. Yves Smith, a prominent financial blogger who has reported on aspects of the Magnetar Trade, writes in her new book, "Econned," [10] that "Magnetar went into the business of creating subprime CDOs on an unheard of scale. If the world had been spared their cunning, the insanity of 2006 — 2007 would have been less extreme and the unwinding milder."
- Chapters:
- 1: The Magnetar Trade
- 2: Magnetar Gets Started
- 3: Magnetar’s (Nearly) Perpetual Money Machine
- 4: E-mails Give Glimpse of How Magnetar Worked
- 5: Concerns About ‘Reputations Risks’
- 6: A Lawsuit Suggests Merrill Lynch’s Role
- 7: JPMorgan Gets Into the Game — And Loses
- 8: Magnetar’s Exit: A Deal so Bad Even a Credit-Rating Agency Balked
- Follow-Up:
- Your Magnetar Questions, Answered(4/16)
- Other Banks Did Deals Similar to Goldman’s(4/16)
- Magnetar Letter to Investors—And Our Response (4/20)
- Merrill Lynch Did a Deal ‘Precisely’ Like Goldman’s, Suit Asserts