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Magnetar Letter to Investors About Our Story—And Our Response

Responding to reporting by ProPublica, the Chicago hedge fund Magnetar sends a letter to investors criticizing the news coverage. It does not deny that it bet against CDOs that it bought, but emphasizes that its practices were not illegal.

Click here to read Magnetar's letter to investors. On Monday, the hedge fund Magnetar sent a letter to its investors defending its practices and criticizing our story about it. (We received the letter from Bloomberg News.) The letter largely amplifies the statements its representatives made to us during our reporting, and which we included at length with our story. We are happy to link here to the Magnetar letter for those who want to see those arguments in fuller detail.

Magnetar’s letter doesn’t deny that it purchased collateralized debt obligation (CDO) equity, that it bet against many of those CDOs, or that it exercised influence over the construction of the portfolios. In particular, it doesn't deny and in one case admits that it pushed for higher returns and hence greater risk in the portfolios. At root, Magnetar says it did nothing illegal. Our story said that this is probably correct; violations of law or rule, if any, were more likely the responsibility of others. In short, we see nothing in our story to correct.

Read Magnetar's letter and our story.

Michelle Kelner

April 20, 2010, 1:16 p.m.

The fact that you see nothing in your story to correct is indicative of your fundamental misunderstanding of the markets and how they work.  It is also quite indicative that hedge fund strategies are something your reporters are completely unfamiliar with. 

What you say may be technically correct but you are focused on the wrong issues.  And singling out a hedge fund, which is NOT protected by TARP and did not have accees to and will never have access to government bail out funds is completely different than pointing a finger at GS who were a beneficiary of TARP funds which the tax payer incurred to future generations.

George Benedict

April 21, 2010, 8:52 a.m.

Michelle Kelner’s comments are spot on.

You state “In short, we see nothing in our story to correct”

In fact, what needs to be corrected in your tone and use of subtle and overt innuendo and bias that I can only attribute to myopic hindsight colored by a negative pre-disposition toward some bright investors that created a strategy using the financial instruments available to them.
The strategy wasn’t so much “diabolical” or “perverse” as it was elegant.

If you want to engage in witch hunting, go after the politically motivated players who pushed for the creation of the sub-prime mortgage products in the first place.

Michelle Kelner wrote:
“The fact that you see nothing in your story to correct is indicative of your fundamental misunderstanding of the markets and how they work.”

Legal does not mean ethical. Imagine a slave trader saying the exact same sentence to an abolitionist in response to criticism in 1810 instead of 2010.

Michelle Kelner

April 21, 2010, 3:27 p.m.

Rishi, with all due respect you have no idea what you are talking about.  Lets talk about ethics for a moment.  You can talk about ethical or not when it comes to the banks and particularly the ones that are the “too big to fail” variety.  Or you can talk about it in the context of those people in our government who created the entire sub-prime mess in the first place but dont try to demonize a single hedge fund whose job it is to make money for doing just that.

Was it ethical for the people at Countrywide to solicit little old ladies to refinance their mortgages to negatively ammortizing ones?  How about the creation of the entire sub-prime market by the wonderful politicians in Washington? 

I think in order to engage in this debate there should be a prerequisite understanding of the financial markets and how they work, and clearly George Benedict has a clue and clearly the reporters at ProPublica are lacking in this capacity and so are you.

Seems to me the people who are upset about this piece of journalism just don’t like people who are not usually privy to how high finance works, to get a clue about how they operate.

I agree this hedge fund did nothing wrong, and in fact I would probably do the same if I had the knowledge and capital at hand at the time.

The fact they made billions is really great.

Good on them.

What I like about this report is that it gives those of us who are on the outside of high finance a glimpse into the inner workings of how the global grease is applied.

There is nothing in this report that I find is factually incorrect after reading the response from Magnetar.

I just think those who have a vested interest in Magnetar are commenting here and are worried their investments could be harmed.

But don’t worry investors, the game is still favored for your scheming as the current finacial reform act is a joke, and there is plenty of capital floating around that needs to be invested, and this report is getting no main stream media attention, and the fools sitting in Congress have no clue what you are doing anyways.

Good luck. It’s all a game anyways.

Good job. Keep on spewing your apologist propaganda, Michelle.

Fellow commenters: let’s leave off shouting “bias!” just because one person favors the journalists’ story and one person favors the hedge fund’s version.

I do think ProPublica owes its readers an explanation.  Magnetar is calling you liars.  How do we know you aren’t?

Magnetar quotes:

“ProPublica simply got the story wrong.”

“[T]he reporters chose to disregard the key fundamental facts”

“Magnetar had a net long notional position [in the CDO’s it sponsored]”

“Magnetar would earn materially more money if these CDOs in aggregate performed well than if these CDOs performed poorly”


So you owe us the following:


-Is Magnetar lying above?

-Did ProPublica imply that Magnetar wanted the CDO’s it sponsored to fail?  (This is said explicitly in the NPR joint piece, and denied explicitly in Magnetar’s letters.  ProPublica’s piece literally says “It placed bets that portions of its own deals would fail,” which is ambiguously an accusation or not.)

-If Magnetar is lying, how does ProPublica know?


Furthermore, your piece implies or hints at several sensational claims which you should be more direct in answering:

-To what extent is Magnetar responsible for prolonging the bubble?

-Is profiting during a record bear market wrong?

 

Obviously, clever dithering is unacceptable to maintain one’s integrity.

This article is part of an ongoing investigation:
The Wall Street Money Machine

The Wall Street Money Machine

Enticed by profits and bonuses, Wall Street took advantage of complicated mortgage-based instruments to reap billions, only to exacerbate the eventual crash.

The Story So Far

As the housing market started to fade, bankers and hedge funds scrambled for ways to maintain the lavish bonuses and profits they had become so accustomed to, repackaging mortgages in complex securities called collateralized debt obligations. The booming CDO market masked how weak the housing market was, and exacerbated its collapse.

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