Magnetar: Why a Criminal Pursuit of the Finance Industry Is Necessary

Criminality as a Broadway musical

Pro Publica, along with the radio folks at Planet Money, have investigated the activities of a hedge fund called Magnetar, which appears to have bankrolled the creation of mortgage backed securities so that they could bet against them.

Note that there are 8 chapters, so you may want to link to the This American Life broadcast, (about 40 minutes) which is less encyclopedic, but rather more streamlined.

Basically, at the end of 2005, it appeared that the housing bubble was moderating, which made people were less interested in investing in the mortgage backed security known as the CDO, because without double digit increases in home prices, the risk levels were higher, and the potential rewards were less.

What Magnetar did was to get banks to write more CDOs by agreeing to buy the worst tranches, the riskiest 3-5% of these instruments, and then everyone else, seeing as how the scum at the bottom of the barrel was taken, would snap up the "higher quality" stuff.

At one point, Magnetar was covering about ½ of the CDO market, and betting against everything that they could get their hands on with credit default swaps (CDS).

And the financial industry noticed their moves into the field, even if they did not know of the CDS bets, to the degree that Business Week predicted that they would be, "shredded".

The folks at Pro Publica have uncovered emails where they were aggrissively pressuring the agents that they set up for the funds to make them as risky as possible, which makes sense, if you are betting against them.

For what it's worth, it wasn't only people like pension funds and municipalities who got burnt by this. J.P. Morgan lost billions by holding onto senior tranches of CDOs that they created for Magnetar, even though it was clear by that time the game that they were playing.

So, why did Morgan do it anyway? Because the people who bought the CDOs generated commissions at the front end, and were then given huge bonuses based on this, so by the time it all went pear shaped, the individual traders had a few tens of millions of dollars in the bank.

By the end of their run, it was so bad that even Moody's refused to rate their CDOs.

This is deeply and perfidiously corrupt and well organized, and I cannot see why RICO isn't being applied to anyone who touched this.

But seriously, read the whole thing. It is stunning in its scope and corruption, but this boggles the mind.

This is not taking out insurance on your neighbor's house and burning it down. Paying for the road out to a sub development so that people will buy houses, and then using a squadron of B-52s to firebomb that development, only that development is our economy.