ProPublica

Journalism in the Public Interest

Cancel

New Documents Show Hedge Fund Magnetar Influenced Deal, Despite Denials

A Financial Crisis Inquiry Commission document shows Magnetar selected assets for a billion dollar Merrill Lynch mortgage securities deal, despite having long asserted otherwise.

.

(Joshua Roberts/Bloomberg via Getty Images)

6:31 p.m.: This post has been corrected.

A Financial Crisis Inquiry Commission document shows the hedge fund Magnetar selected hundreds of millions of dollars' worth of assets that went into a billion dollar Merrill Lynch mortgage securities deal, despite having long asserted otherwise.

As we reported last year, Magnetar helped Wall Street investment banks create at least $40 billion worth of mortgage securities deals known as collateralized debt obligations, or CDOs. The hedge fund also bet against many of those CDOs as part of an investment strategy that paid off handsomely when the housing market crashed and those CDOs collapsed. (Our story was done in collaboration with NPR's Planet Money and Chicago Public Radio's This American Life.)

The hedge fund has consistently denied that it selected assets for the CDOs in which it invested and often bet against. Last April, in response to questions from ProPublica, the hedge fund said that "Magnetar did not choose the assets in any CDO." ProPublica's story on the Magnetar trade detailed how the fund had an active role in building these CDOs and in choosing assets that were riskier than might have otherwise been chosen.

The Financial Crisis Inquiry Commission released its final report today on the causes of the financial and economic crisis in the United States. The report quotes from a letter in a lawsuit that contradicts Magnetar's assertion.

Magnetar used a CDO called Norma to create a $600 million bet against subprime mortgage securities, according to the document. The CDO itself took the other side of the bet, and ultimately cost investors in Norma hundreds of millions of dollars. Merrill Lynch underwrote and marketed the $1.5 billion Norma. 

According to the commission report, Magnetar made the selections without the knowledge of the manager legally charged with picking the assets for the CDO or the risk department of the bank that helped create the deal.

The collateral manager, NIR Capital Management, was paid to manage the deal and was supposed to be independent of the investment bank and act in the interests of the CDO as a whole. The Norma offering document says that NIR would select the assets that went into the CDO, and no mention is made of other parties' roles in asset selection.

"When one Merrill employee learned that Magnetar had executed approximately $600 million in trades for Norma without NIR's apparent involvement or knowledge, she e-mailed colleagues, 'Dumb question. Is Magnetar allowed to trade for NIR?' " according to the report.

The Merrill employee was one of the risk managers in charge of policing the firm's CDO business.

"NIR abdicated its asset selection duties to Magnetar with Merrill's knowledge," the FCIC report states.

The e-mails relating to Magnetar's selections of assets for Norma were revealed as part of a lawsuit between Netherlands-based Rabobank and Merrill Lynch. After the e-mails and other documents were produced during discovery, Merrill Lynch settled the lawsuit for an undisclosed amount.

The e-mails were quoted in a letter from Rabobank's lawyer, and they provide new evidence that Magnetar stood to gain substantially more from its bets against the CDO, or short positions, than from its investment in the CDO. And Merrill Lynch was aware of the hedge fund's motivations.

"Merrill recognized that such short positions were more important to Magnetar than its long investments," states the letter.

Magnetar's investment in Norma totaled less than $50 million, according to the letter. "This meant that Magnetar stood to make 10 times more from its $600 million short position if Norma failed than Magnetar had invested in equity."

Interestingly, Magnetar received $4.5 million in what a Merrill document described as the CDO's "expenses." According to the FCIC report, Merrill failed to disclose that to other investors. Magnetar's counsel explained the $4.5 million to the FCIC as "a rebate" on the hedge fund's purchases.

Magnetar and NIR didn't immediately respond to requests for comment.

The FCIC ran into a roadblock in its investigation of the Norma transaction. Bank of America, which now owns Merrill Lynch, "failed to produce documents related to this issue requested by the FCIC," the report says.

Bank of America's counsel told the FCIC that it was "a common industry practice" for equity investors to have input during the collateral selection process and that the collateral manager had the ultimate decision regarding asset selection. A spokesman for Bank of America declined to comment to us on the specifics of the Norma deal.

Correction: This post previously stated that the FCIC quoted e-mails via a letter that had been filed with a court. In fact, they quoted e-mails from a similar letter that hadn't been filed.

We may be stymied by the uncertainty of litigation, and of the propriety of pursuing the “luxury” of Justice after the 2008 Collapse. 

However, the Administration has taken what exigent steps could be taken to address the Collapse. In addition, the long-awaited FCIC report is complete.

Now, we have to follow up, and sanction, so as to prevent further abuse, the Causes of the collapse. Greed is not criminal, but FRAUD is.  Those who perpetrate fraudulent schemes to cheat and distort the marketplace, to its ruination, must pay.

Where are the District Attorneys, the Attorneys General, and the Members of Bar Associations?

The FCIC findings are evidentiary. Much of the work has been done. Now we need to recover the tax payers’ and retirement/pension money from the billionaires who stole it.

The Magnetar “denial” under oath of what their own records reveal they did, is the crime of perjury on top of the felony of fraud.

Great Kudos!  Thanks to Jesse Eisinger and Jake Bernstein (and ProPublica, Jan. 27, 2011), for following up on a story done over a year ago.

You kept your focus on the determinative facts in spite of the relentless efforts of the Financial Industry to fund many political distractions.

The masters of the universe are basically metrecious ponz-scheming swindlers and should all be jailed.

So…. here we are, yet again…

see: The Economy Is Still at the Brink, OP ED, The New York Times, Sunday, June 9, 2007 - full page: focus on RICO and Use Immunity language. By Sandy Lewis and William D. Cohan.

If this is crime - and I have little doubt - it’s RICO time. Foreigners have access to US courts.

All players similarly engaged. All. 

This is the ethic of risk arbitrage c. Ivan Boesky and Robert E. Rubin - run amok. Freeman went to jail and remained silent.

Gus Levy, L. Jay Tenenbaum et al and the mavens at LFR.

It’s linear - the etiology commenced in the 1950’s between L F Rothschild & Company and Goldman, Sachs as L J admitted before his death at 878.

Read the forthcoming volume - third of three. It will set you free.

It does not get any better - or worse.

So…. here we are, yet again…

see: The Economy Is Still at the Brink, OP ED, The New York Times, Sunday, June 9, 2007 - full page: focus on RICO and Use Immunity language. By Sandy Lewis and William D. Cohan.

If this is crime - and I have little doubt - it’s RICO time. Foreigners have access to US courts.

All players similarly engaged. All. 

This is the ethic of risk arbitrage c. Ivan Boesky and Robert E. Rubin - run amok. Freeman went to jail and remained silent.

Gus Levy, L. Jay Tenenbaum et al and the mavens at LFR.

It’s linear - the etiology commenced in the 1950’s between L F Rothschild & Company and Goldman, Sachs as L J admitted before his death at 87, last week.

Read the forthcoming volume - third of three. It will set you free.

It does not get any better - or worse.

After reading this article and others on the same subject, I have one question; why is Bernie Madoff in jail?

They’re all in bed together!  The politicians, primarily the Democrats have made deals with these bankers and think they can hoodwink the public into thinking they’ll try and “help” those homeowners in distress.  Wake up people!  It’s all about the MONEY!  Politicians palms are being greased in the form of “campaign contributions” and back room deals.

Check out: http://www.opensecrets.org  Non partisan website that is privately funded to show where the money in politics is coming from and going to whom!  Check it out.  It’s’ an eye opener.

Read the THE BIG SHORT.  by MIchael Lewis

Michael Lewis knows how to write a best seller.

Does Michael Lewis know markets, market structure, or the players?

This is great but are you guys going to do a report on the full report? No one really has (at least not one that really sheds any light on it).

I do want to read it myself, but a good summary would be awesome.

http://thistoowillpass.com/

I enjoyed and admired the original This American Life broadcast, so it pains me somewhat to nitpick.  To assert the FCIC report is proof that Magnetar selected the assets in the CDO is incorrect.  The report does not offer proof, but instead quotes from an allegation in a letter that was part of a lawsuit against Merrill Lynch. The allegation by a party in a lawsuit is not proof of any kind. Nor is the fact that Merrill Lynch and the other party ended up settling their litigation later. The claim by ProPublica that this is definitive proof is incorrect at best, and dishonest at worst.

The FCIC report is clear this financial disaster was avoidable So what repercussions will these Wall Street/ Banking thieves be held accountable for? The Keating Five, Savings and Loan scandal put people in jail….so where is the Attorney Genera?
Why isn’t the administration raising hell? It was
President Obama who created the FCIC to find
out the truth. The FCIC did their job…so it’s time ALL these greedy thieves be held accountable. Thanks for following up on Magnetar.

Again, let me ask, why is Bernie Madoff in jail? He was a Kindergartner compared to these Banksters.

I think the answer is, he didn’t pay off the correct legislator or government official.

What other answer could there be?

Keep it up Propublica, sooner or later the media dumbed down populus will wake up and smell the garbage.

Martha Paschal

Feb. 2, 2011, 5:03 p.m.

We need very visible and public perp walks and some hard jail time for some of these characters, if for no other reason than to dissuade the rest of the Wall Street jokers from this type of behavior.

Unfortunately I’m in agreement with the rest of the folks who think there’s just too much money flowing from Wall Street to Capitol Hill for that to happen.

There is no closure till the perpetrators of the crimes are punished fairly. Whole country is still waiting for the closure. After this we can move-on.

@Roger-There will be no closure…only foreclosure. Now be a good U.S. citizen, quit whining and be sure to pay your taxes!

@Roger-I hope you know I was doing my best ...hole impression. I meant no disrespect towards you. Just a ton of frustration this past few years. My apologies.

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.

Get Updates

Stay on top of what we’re working on by subscribing to our email digest.

optional

Our Hottest Stories

  •  
  •  
  •  
  •  
  •  
  •  
  •  
  •  
  •  
  •