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SEC is ‘Focusing’ on Magnetar Trades

According to the Wall Street Journal, an SEC investigation into the complex mortgage securities at the heart of the financial meltdown is “focusing” on deals by the hedge fund Magnetar.

As we reported in April, Magnetar worked with Citibank, JP Morgan Chase, Merrill Lynch, and other top banks in the run-up to the crisis to help create nearly $40 billion in so-called collateralized debt obligations that in many cases the hedge fund also bet against. People involved in the deals—which were made just as the housing market was beginning to fall apart—said Magnetar pushed for particularly risky assets to go into the investments.

(In response, Magnetar said it did not have a view on the housing market, was “net long” the CDOs it invested in, and never chose the specific assets inside them. Our story was co-produced with Chicago Public Radio’s This American Life and NPR’s Planet Money.)

Saturday’s Journal reported that as part of a “broad examination” into CDOs, SEC investigators “are holding face-to-face meetings with Wall Street executives about deals” involving Magnetar:

The focus of the interviews is how these particular securities were put together, people familiar with the matter said.

Among other things, investigators want to know how the assets that were put into the CDOs were valued at the time, what the terms of the deal were, what triggers were put in place to determine whether investors would incur losses and at what point did firms involved in the deal bet against the assets in the CDO, people familiar with the matter say.

A spokesman for Magnetar told the Journal: "As we understand it, the entire CDO market has for some time been under review by various regulators. From time to time, Magnetar has received related inquiries and we have responded to the best of our ability to these requests."

In our original story, we noted that the “SEC has been looking into how the Magnetar deals were created,” and in response Magnetar gave us nearly the same response as it did the Journal. The hedge fund also told us: “We are not aware that this inquiry is focused on any particular person or firm.”  

After the Journal’s report, we contacted Magnetar and it declined to comment.

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