Posted in: Risky Investments |
Goldman Sachs was charged last week by the Securities and Exchange Commission for fraud related to subprime debt offerings, and has since been lambasted by both politicians and the press. Goldman Sachs executives’ e-mails were leaked ahead of U.S. Senate testimony, which admitted prior knowledge of how dangerous John Paulson’ s hedge funds really were.
Even though the spotlight being shown on Goldman Sachs is appropriate considering how they harmed investors, we should not lose sight of the fact that many other major banks sold billions in subprime collateralized debt obligations (CDOs), and that more information is being learned about these deals every week.
ProPublica has had fantastic coverage on Magnetar Capital’s hedge fund deals, which had purchased collateralized debt obligations from JPMorgan Chase, Merrill Lynch, Citigroup, Deutche Bank and UBS. According to ProPublica, Magnetar manipulated its deals - 97 percent of which would be in default by 2008 - and here’s how:
How Magnetar pulled this off is one of the untold stories of the meltdown. Only a small group of Wall Street insiders was privy to what became known as the Magnetar Trade. Nearly all of those approached by ProPublica declined to talk on the record, fearing their careers would be hurt if they spoke publicly. But interviews with participants, e-mails, thousands of pages of documents and details about the securities that until now have not been publicly disclosed shed light on an arcane, secretive corner of Wall Street.
According to bankers and others involved, the Magnetar Trade worked this way: The hedge fund bought the riskiest portion of a kind of securities known as collateralized debt obligations — CDOs. If housing prices kept rising, this would provide a solid return for many years. But that’s not what hedge funds are after. They want outsized gains, the sooner the better, and Magnetar set itself up for a huge win: It placed bets that portions of its own deals would fail.
Along the way, it did something to enhance the chances of that happening, according to several people with direct knowledge of the deals. They say Magnetar pressed to include riskier assets in their CDOs that would make the investments more vulnerable to failure. The hedge fund acknowledges it bet against its own deals but says the majority of its short positions, as they are known on Wall Street, involved similar CDOs that it did not own. Magnetar says it never selected the assets that went into its CDOs.
The story of Magnetar is a horrific one, because it perhaps reveals more of the direct cause of the harm inflicted on investors. Banks like Citigroup, Deutche Banks, Goldman Sachs, JP Morgan Chase held offerings for CDOs and marketed these offerings as safe, but perhaps their greatest wrong was not alerting customers to the existence of Magnetar hedge fund’s involvement.
Goldman Sachs last week, while denying its own charges, compared their involvement with hedge fund manager John Paulson with other firms’ involvement with Magnetar.
And as for investors, there is no shortage on those who could have been affected. If you invested with any bank affiliated with Magnetar hedge fund, we can help you take steps towards recovering on your lost investment.
Investors in CDOs owe it to themselves to find out more about firms like Magnetar—not just Goldman Sachs.
