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Merrill Lynch Investigated for CDO Deal Involving Magnetar

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Merrill Lynch headquarters as seen on Oct. 29, 2007, in New York City. (Mario Tama/Getty Images)

The Securities and Exchange Commission is investigating whether Merrill Lynch short-changed investors and gave undue influence to the hedge fund Magnetar in the creation of a $1.5-billion mortgage-backed security deal.

The investigation, which was first reported by the Financial Times ($), appears to be the agency’s first probe of Merrill Lynch’s CDO business since the financial crisis. (Check our bank investigations cheat sheet for which other firms are being probed.) Here’s the FT:

The investigation is one of several SEC probes into banks that helped underwrite billions of dollars of collateralised debt obligations, securities comprised of mortgages or derivatives linked to them.

It also marks a broadening of the SEC’s investigation into the role of collateral managers, institutions that help select the assets included in CDOs.

The deal that the SEC is investigating—a collateralized debt obligation, or CDO, called Norma—was detailed both in our reporting last year and in a report by the Financial Crisis Inquiry Commission released in January. Norma was one of more than two dozen CDO deals done by Magnetar, whose bets against a number of CDOs earned it billions in the waning days of the housing boom. 

As the FCIC detailed, Magnetar helped select the assets that went into Norma even though it had a $600 million bet that would pay off substantially if the CDO failed. As we reported, Magnetar often invested in the portion of the CDO that was riskiest and hardest for the banks to sell. Banks typically gave such investors—equity investors—more say in how the deal was structured. (Magnetar isn’t named as a target of the investigation and had no responsibility to investors. It has also maintained that it did not have a strategy to bet against the housing market.)

In the offering documents for Norma, there’s no mention of Magnetar’s role in asset selection, according to the FCIC. Investors were told that an independent collateral manager, NIR Capital Management, would be selecting the assets with their best interest in mind. The report concluded: "NIR abdicated its asset selection duties … with Merrill's knowledge." 

Bank of America, which took over Merrill Lynch in 2008, declined our request for comment. The firm’s general counsel told the Financial Crisis Inquiry Commission that it was “common industry practice” for equity investors to have input during the asset selection process, though the collateral manager had final say.

NIR Capital Management is also being investigated by the SEC, according to the FT. The firm did not immediately respond to our request for comment. (The Wall Street Journal did an impressively detailed story in 2007 on how NIR came to be manager of the Norma deal.)

Magnetar declined our earlier requests for comment on Norma, but FT reports it has denied claims that it selected the assets for Norma.

As we reported, the SEC had launched a probe of Merrill’s CDO business 2007, but that investigation petered out without any resulting charges.

Piggybankblog

June 16, 2011, 4:48 a.m.

When I think of Brian Moynihan or Barabra Desoer, I think of the song by John Lennon called Piggies:
So if it walks like a piggy, talks like a piggy, by golly it’s a PIGGY!
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WHERE IS MY LOAN MODIFICATION BANK OF DESTROYING AMERICA!
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BofA and it’s CEO Brian Moynihan reminds me of that song by John Lennon and George Harrison titled “Piggies” I invite you to listen to this song on youtube and see if it appropriately fits.
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http://www.youtube.com/watch?v=ovD9rTzs2q4&feature=player_embedded
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Have you seen the little piggies
Crawling in the dirt
And for all the little piggies
Life is getting worse
Always having dirt to play around in.
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Have you seen the bigger piggies
In their starched white shirts
You will find the bigger piggies
Stirring up the dirt
Always have clean shirts to play around in.
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In their ties with all their backing
They don’t care what goes on around
In their eyes there’s something lacking
What they need’s a damn good whacking.
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Everywhere there’s lots of piggies
Living piggy lives
You can see them out for dinner
With their piggy wives
Clutching forks and knives to eat their bacon.
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When I filed my lawsuit against Bank of America, I thought of the many others out there in the same situation.  It was then that we decided to educate the public on what these piggy banks are doing, as well as unite us all together as one voice.  Please help me turn this David vs. Goliath modification process, into a Goliath vs. Goliath. 
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Please stand with me and Brookstone Law Firm, and send an email to Bank of Abusing America that states that we will no longer tolerate their potentially illegal, fraudulent, irregular and abusive business methods. 
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So please send your email directly to Bank of America and include the following:
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1.  Your name
2.  Your complaint concerning your experience with Bank of America.
3.  Please end your email “I support John Wright vs. BofA Lawsuit!”
4.  Please send a copy of your email to .(JavaScript must be enabled to view this email address)
5.  Please send your email to BofA CEO Brian Moynihan:
    .(JavaScript must be enabled to view this email address)
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I HAVE HAD ENOUGH AND I AM FIGHTING BACK! 
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I have created piggybankblog.com for all of those who have been abused by Bank of Destroying Americas potentially irregular, fraudulent and simply abusive home loan modification process. 
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Divided we might have fell America. UNITED WE MUST STAND!
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http://www.youtube.com/watch?v=PoOJMr7OJ0s
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My name is John Wright AND I AM FIGHTING BACK!
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John Wright
piggybankblog.com

Good for you, Mr. Wright, and good luck!

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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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