Magnetar Responds to Our April Story—And Our Response
In April, we reported that Magnetar helped spur the creation of at least 30 collateralized debt obligations, worth about $40 billion, as part of a strategy to bet against the mortgage securities market. The fund would purchase the riskiest portion of the deals, enabling the banks to complete the transactions. Magnetar also frequently bet against those same deals, using sidebets. (We detailed Magnetar’s trades in a story in partnership with Chicago Public Radio’s This American Life and NPR’s Planet Money.)
One such deal was Squared, a collateralized debt obligation arranged by J.P. Morgan, completed in May 2007. Having declined to respond to our questions on Squared for our April story, Magnetar now disputes ProPublica’s account of the Squared transaction.
Magnetar gave their response in a Sept. 30 letter, which they sent after receiving questions from ProPublica. We have been reporting on the matter since receiving Magnetar’s letter, and we stand by our account of Magnetar’s role in structuring the transaction.
Magnetar said in its letter that the Squared transaction was initiated by GSC and JP Morgan “independently of Magnetar and well before Magnetar agreed to invest in the equity tranche of Squared.” Magnetar says it wasn’t involved in the naming of the deal. (Read the letter.)
Magnetar also said in its letter that that the fund “did not at any time require or expect any specific assets to be purchased into the Squared transaction.” The fund said GSC, a third-party CDO manager, “at all times exercised its own discretion and judgment regarding the characteristics and appropriateness of each of the assets selected for inclusion in Squared.”
In the original story, ProPublica wrote that the hedge fund “requested that Squared have slices from many Magnetar CDOs, including Auriga, Carina, Libra, Pyxis and Virgo. They all went into the deal.” The story also said Magnetar successfully pushed for Squared to include a slice from one of the Abacus deals, a group of CDOs that Goldman Sachs had created and bet against.
In its letter, the fund says that assets linked to Carina, Libra, Virgo and Abacus were purchased for Squared “prior to Magnetar’s agreeing to purchase equity in Squared.” Though the assets linked to Auriga and Pyxis were selected by GSC after Magnetar agreed to invest in the equity of Squared, they were selected by GSC, acting independently, according to Magnetar.
ProPublica’s original source, a person familiar with the transaction, continues to maintain that Magnetar requested that specific assets go into Squared. This person also says that emails show Magnetar executives discussing specific assets with bankers from JP Morgan.
GSC had been the manager on four previous Magnetar CDOs, in which it had purchased equity. The manager was familiar with the type of collateral that went into Magnetar deals. Because of this, the timing of Magnetar’s agreement to purchase equity in Squared may not be relevant in answering the question of whether it influenced the selection or not.
The original ProPublica story said that “unlike the earlier CDOs it helped create, Magnetar didn't name this one after a constellation. Opting for a more literal name, they called the deal ‘Squared,’ after the term for a CDO that was made up of other CDOs.”
Magnetar’s Sept. 30 response says that the transaction, having been initiated before it agreed to invest in the equity, was already named Squared and that Magnetar “had nothing to do with the naming of Squared.”
We have corrected the story to remove the suggestion that Magnetar named the deal.
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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