kottke.org posts about Magnetar

Built to failApr 21 2010

When I pointed to the last week's news that the SEC was suing Goldman Sachs for fraud, several people pointed me to an episode of This American Life that ran a couple of weeks ago.

A hedge fund named Magnetar comes up with an elaborate plan to make money. It sponsors the creation of complicated and ultimately toxic financial securities... while at the same time betting against the very securities it helped create. Planet Money's Alex Blumberg teams up with two investigative reporters from ProPublica, Jake Bernstein and Jesse Eisinger, to tell the story. Jake and Jesse pored through thousands of pages of documents and interviewed dozens of Wall Street Insiders. We bring you the result: a tale of intrigue and questionable behavior, which parallels quite closely the plot of a Mel Brooks musical.

The allegation against Magnetar is that they helped create extremely risky CDOs, bought the worst part (the lowest tranche) of those CDOs for a little money, and then bought a bunch of insurance against the CDOs for a lot of money. The CDOs were basically built to fail and when they did, Magnetar lost a little money on their purchase but made a bunch more from the insurance. Pro Publica has the whole story.

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