Journalism in the Public Interest

Emails Give Glimpse Into Deals That Fueled Financial Meltdown

Hedge fund Magnetar and Wall Street banks created $40 billion of deals. The emails show how they did it.

New York Stock Exchange (Mario Tama/Getty Images)

As ProPublica has been detailing for two years, Wall Street banks and the hedge fund Magnetar worked together to build mortgage-backed deals that the hedge fund also bet against. The more than $40 billion of deals helped fuel the crash of 2008.

Now, recently collected emails from bankers and a Magnetar executive involved in some of the deals appear to shed new light on how they did it.

Fiduciaries threatened with a loss of business if they didn't cooperate. Prime movers behind a billion-dollar deal suggesting they need to keep their actions hidden. It's all portrayed in the emails, which were included as part of a civil lawsuit against Magnetar filed in New York's Southern District Court in late June. (Our reporting is also cited in the complaint.)

The suit was brought by Italian bank Intesa San Paolo, which lost $180 million on an investment linked to a mortgage bond deal put together by Magnetar and French bank Calyon. The deal was "built to fail," in the words of the complaint.

Boston-based Putnam was the manager on the deal, called Pyxis 2006, which involved the creation of a $1 billion collateralized debt obligation. The managers in such deals were supposed to be independent and looking out for all investors' interests.

Intesa is suing all three players, Magnetar, Calyon and Putnam. Intesa, which is seeking unspecified damages, accuses Calyon and Putnam of misrepresenting the deal and Magnetar of acting in a conspiracy with Calyon and Putnam to aid and abet fraud. (Much of the information cited in the suit comes from an earlier case involving many of the same players that was settled.)

As with all partial document trails, the emails are open to a variety of interpretations. Magnetar says they have been selectively excerpted and that the more complete email chains don't show what the plaintiff alleges.

The firms involved in the deal — Magnetar, Putnam and Calyon — filed motions to dismiss the suit last month.

A Putnam spokesman said, "The lawsuit is completely without merit and will be defended vigorously." A Calyon spokeswoman declined to comment.

Magnetar is reportedly under SEC investigation. The hedge fund says it has not received a formal notice of possible charges from the SEC and calls the lawsuit "meritless." The hedge fund reiterated that it "did not control" what went into the deals, known as collateralized debt obligations. (Read their full response.)

Here are some excerpts from the emails, with our captions: 

On June 14, 2006, an executive from Calyon wonders if Magnetar's participation should be hidden, that is, remain "behind the scenes and outside of the docs" in "exactly the same way we did" with another Magnetar CDO:


Magnetar's Jim Prusko responds: "No, not at all. What's your number?" Magnetar points to that response as exculpatory.

Yet a week later, Calyon, Magnetar and Deutsche Bank (which was also investing in the deal and playing a similar role as Magnetar), discussed creating a side agreement giving Deutsche Bank and Magnetar veto power over assets that were to go into the deal. Such side agreements were rare and would have left some investors unaware of important details of the deal.


Ultimately, that side deal was never consummated, according to Magnetar. But Magnetar made sure it knew about the asset selection for the CDO, which Intesa charges is an example of its secret control. Neither Magnetar's influence in the deal nor the hedge fund's bet against it were clearly disclosed to investors:


As the linchpin investor on the CDO, Magnetar needed to know what went into the investment, the hedge fund says. This does not indicate it ultimately controlled what went into the deal. Magnetar points out that Prusko, the Magnetar executive, wrote to the manager in an earlier email that the hedge fund will buy assets "of your choosing":


Though Calyon, which created and marketed the deal, told Intesa that it would select some better-quality, "prime" assets, none got in there, according to the complaint:


A key issue is who exactly knew whether Magnetar was betting against, or shorting, the deals in which it was investing. In one of the email exchanges, from September 2006, executives from Calyon and Putnam discuss who is shorting. The Putnam executive says: "It is definitely Magnetar." In other words, the manager who was supposedly looking out for investors' interests claimed to know that Magnetar was betting against the deal:


Other emails refer to a CDO manager, the Dutch-owned NIBC, which was involved in another Magnetar deal. (As we reported in 2010, NIBC once pushed back against perceived pressure from Magnetar to make a deal riskier.)

Regarding another Magnetar deal, Calyon's Alex Rekeda writes in November 2006 that NIBC is concerned that it is ceding too much power to Magnetar and Deutsche, which was again partnering with Magnetar on the deal. He also relays another concern: "They feel very strongly that the older vintage bonds that they have in the portfolio have by far superior credit characteristics compared to the bonds they can pick up in the market now." Translated: NIBC was feeling pressure to buy riskier bonds and didn't think doing so would benefit investors.

(Last month, the Securities and Exchange Commission settled securities law charges against one of the players, the former Calyon banker Rekeda, accused of violating securities laws in conjunction with another Magnetar CDO. Rekeda did not admit or deny wrongdoing.)


Deutsche's Michael Henriques replies that the original investors — which include Magnetar and Deutsche Bank — are taking "execution, credit and manager risk." That suggests Magnetar and Deutsche viewed themselves as the real managers of the CDO, not the supposedly independent NIBC. Henriques, who later went to work for Magnetar, also complains that NIBC is treating Deutsche Bank and Magnetar poorly, lacking "a spirit of partnership."


That same day, Deutsche's Henriques threatens to withdraw a lucrative line of business from NIBC:


In another deal from a few months earlier, Magnetar's Prusko had also threatened to withhold business from the manager, Putnam, if it did not "play ball":


Magnetar says Prusko's email solely refers to the fees on the deal, and not about controlling asset selection or any other issue.

In a statement, Magnetar said: "Intesa's decision to amend this complaint appears to be little more than a transparent effort to sensationalize a baseless case in which each defendant has already moved for dismissal.

"As the Plaintiff is well aware from the motion to dismiss we filed some time ago, no Magnetar entity was a party to the credit default swap at issue in the case, and we were not even aware of that transaction until this complaint was filed.

"We continue to believe that Intesa's accusations are meritless, and that the case should be dismissed.

"And, as we have stated numerous times in the past: Magnetar did not control the asset-selection process and our Mortgage CDO investment strategy was designed and implemented to maintain a market-neutral portfolio."

While this is amusingly damning evidence, it seems like Magnetar is being named the official scapegoat for the purpose of pretending that this sort of thing wasn’t pervasive across the entire financial system.

Penalize one company (fine them some nominal amount, before it goes to trial, of course), and the rest of Wall Street is absolved of its sins.  Watch where Magnetar’s executives fall when they leave.  Smart money’s on Goldman or the Treasury, not that there’s much difference between the two.

OK, so you caught one student cheating. But what were all of us thinking when all the students in class scored an A over and over again, prior to the Fall of 2008? Mass-dilusion?
I think we can do better. One reason why upcoming crises are not noticed is that the early proof of behavior that can cause collapse is dismissed as incidental or anecdotes. No one wants to believe, no, no one can, see that the problem may have affected every part of a system. So we are blind? No, we can see it by looking at it from another angle. Rotten systems can be diagnosed early by looking for behavior that is indicative for the formation of cartels or syndicates. This is when companies adjust their behavior among themselves in order to make more profit by decreasing competition. The EC Directorate General for Competition has an ongoing record of success doing just that. I wish for the large economies like the US to have the same know-how and the political support to give those watchdog institution the power to act.

@ John & Maurice: Excellent comments gentlemen. Let’s not forget, however, the political lackeys of both parties; their willingness to overlook the behavior this long is their own golden parachute.

What I find really amusing is the chant about filing a motion for dismissal like that is supposed to mean something.  The first thing the lawyers do is file for dismissal on whatever grounds they can make up.

Debt Neutrality

Aug. 7, 2012, 12:13 a.m.

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Please consider supporting the Debt Neutrality petition.

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Motion, Judicial review etc. of British model Courts in this 21st century are no longer useful in order to honestly serving justice.
This kind of problems are originating from too much amended old books of laws and a priviledged group of guys in the law business.
We have to restart with making a new set of basic laws again that will include financial matters and the fake power of the law professionals first and at the same time we are in need of writing and adding new simplified law books to replace old, manipulative and purposely complicated jargons of last centiry’s stinky law books..

So how many people have been jailed over this kind of behaviour?  None.  How many are likely to end up in jail?  Well, maybe one or two unlucky scapegoats, but probably none.  And anyone who does will keep their riches.

What about locking a few of these criminals up, not just talking down the businesses but taking names.  We’re talking about people who have lied, cheated, stolen from customers and bet against customers - how can they still be employed in the same business and the same jobs, earning new bonuses for taking other peoples’ money?

Clearly as Magnetar says, they have done nothing wrong.
Besides, banks regulate themselves, right?

Just more examples of why these banks cannot be trusted to regulate themselves and the SEC needs to be more rigorous in oversight of their transactions. Also still too big to fail. Is investment and banking separated yet?

clarence swinney

Aug. 7, 2012, 10:03 a.m.

Democracy to Corpocracy

It will take some Ted Kennedy types to change redistribution downward

Change campaign-Election System—no $$$—6 Months Campaign—3 primary—3 general
Provide free equal tv time—Debate a week=12=Adequate to evaluate candidates
Hang Corp Person
Return Glass-Steagall—Remove deposits from Big Banks to local owned country banks like S&L.
Keep $$ circulating in each county not foreign lands. It will finance local start-ups and expansions..

Since there will be no need to raise camaign funds keep them on the job not on the road

Ban all federa;l employees from taking anything with a financial value
This is bigggie.. closes K Street Bribery

clarence swinney

Aug. 7, 2012, 10:57 a.m.

who won?
Simple Numbers Tell a Big Story
% of GDP
2000-Revenue= 20%—Spend=18%=SURPLUS
2009———————15%——————25%=$1400B DEFICIT

Time line
Revenue “down” 30% and Spend “up” 33%= $6000B BORROWED

Who gained? Who lost?
Rommmmmmney $$$$$$$


Aug. 7, 2012, 1:24 p.m.

Will This Affect Your Vote?
3 Republican Presidents—18 years R Senate—12 years R House
Brief on accomplishments::
Budget-600 to 3500 (less wjc itsy)
Debt—1000 to 10,000
Deficit—Surplus to 1400 Deficit
Jobs-218,000 per month to 99,000
10—initiated our involvement in 10 foreign conflicts where
hundreds of thousands died and wasted billions
Smashed the great S&L Industry
Smashed the Housing Industry
17 Million manufacturing jobs down to 11 million
Watched our Manufacturing Industry move overseas
as Multi Nationals made record profits

Want more of this?

clarence swinney

Aug. 7, 2012, 2:21 p.m.

Social Security-Medicare-Medicaid-GI Bill-Savings & Loan Industry-Marshall Plan-Peace Corps-Small Business Investment Act- Schip-Clean Air Act-Voter Rights—Head Start-Peace in S. Africa-Peace in Northern Ireland-Minimum Wage-Veterans Administration-Fairness Doctrine—Revenue Sharing My list has 89 can you name 10 by Republicans?

These emails are evidence of the problems the financial sector has in claiming innocence. It is almost 5 years later since the recession hit and after almost billions of dollars in settlements, these emails show a far different side and action that was shown to the public. These emails show the ins and outs of the negotiation process and how the banks got what they wanted. Hopefully these emails and others which are bound to come out can help the plaintiffs who are suing for misdeeds to win their cases and stick it to the banks.

clarence swinney

Aug. 7, 2012, 4:16 p.m.

1.From Harding In 1921 to Bush in 2003
2.Democrats held White House for 40 years and Republicans for 42.5 years.
3.Democrats created 75,820,000 net new jobs—Republicans 36,440,000.
4.Per Year Average—Democrats 1,825,000—Republicans 856,000. WOW
5.Republicans had 9 presidents during the period and 6 had depression or recession.
6.Republicans had a recession/depression in 177 months and Democrats in 32 months. WOW.
—————————Each “significant” one was under a R president————————————-
7.DOW—1928 to 2003—Stock market gained 11% average per year under D presidents versus 2% under R presidents. Small Cap stocks gained 18% as yearly average under D and minus 3% under R
8.GDP—grew by 43% more under Democrats. WOW
9.Income Growth—1948-2005—each increased (percentage wise)under D presidents over R presidents by these numbers—Quintiles—(Top-10%)—(2nd-71%)-(third-127%)-(fourth-212%)-(fifth-550%) WOW

source—TimothyNoah—Nov. 2010 in Slate magazine .(JavaScript must be enabled to view this email address) 
Question—Why would a working person vote for a Republican for President?
            Shhh do not awaken democratic leadership!

clarence swinney

Aug. 8, 2012, 7:38 a.m.



Max Baucus—Chair Senate Finance Comm—70% poll for Public option—
Bill hit his comm—- first act—removed public option for debate
shocked me—I trusted him. Zap. Report=he had $1,900,00 in his campaign kitty from health care industry..

The millions spent by thousands of Lobbyists expect favors. Buy them.

We need a Washington revolution and kick all out

Obama lost me with Gay Marriage. Totally disgusted. I am in a position I trust no one in Washington. I know few are very good but $$$$$$$$$$$$$$$$$$ BUYS ANYONE

$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$  OUT OF GOVERNMENT———QUICK

NYT had superb article on Wall Street employees going into many many many government jobs in Congress and White House

They left for a much lower paying job.
Conclusion—Wall Street biggies are placing them in positions to make decisions for Wall Street.
Pay under table or? Many have done this. Worked in Wash for few years then back to Wall street into a higher paying job

This is sad sad.  RULES MUST CHANGE

NO $$$$$$$$$$$$$$$$$$$$$$$$  IN WASHINGTON  

NYT had article on Interconnectivity between Board Of Directors in WSA firms
You vote for my pay+pension I vote for yours

5 big banks own 50% of deposits in 7000 banks and 10 own 80%

Restate Glass Steagall—-separate Casinos from local banks

County Banking Systems—local wealth kept local to create more local wealth and jobs
WASHINGTON SOLUTIONS (Congress + White House)
Requires overturning Corp is a person
1. fed fund election—6 mos-3 primary 3 general—free equal tv time—debate a week=12=adequate to evaluate candidates NO $$ =O
2. Since they will not need campaign funds Ban them from receiving anything of a financial value   this closes K St.
3. Progressive Flat Tax by group—We have the income to pay our way-do it
We rank #2 as lowest taxed in OECD nations. We have an income of $14,00 billion yet tax 2400 and borrow 1300. Dumb?

(I wonder what it is about this topic that’s brought out all the off-topic propaganda…)

Karen, I agree that the government was largely complicit, hence my point that Magnetar is the official scapegoat.  Blast them at high noon so that the SEC and DoJ can show how manly they are, and ride off into the sunset while the Magnetar executives are quietly rewarded for their time and troubles.

clarence swinney

Aug. 8, 2012, 9:21 a.m.

May it survive Corpocracy and go back to Democracy
My Solutions——
A. People repeal Corp is a man

B. Fed Fund Election-Stop two yr campaigns waste of money/ time
6 months—3 for Primary Campaign—3 For General Campaign
free equal tv time-provided by “our” tv airwaves
One Debate a week. That is 12 And is adequate to evaluate candidates,
This stops need to raise campaign funds. Congress and White House can stay on the job instead of constant traveling to raise funds. Restrict outside campaign funds.

C. Since there is no need for campaign funds BAN members of the government from receiving anything with a financial value current or future promises. Stop the bribing by Lobbyists.

D. Progressive Flat Tax By Group-we have a $14,000 income a 3800B budget yet rank #2 in oecd nations as lowest taxed. We refuse to tax wealth enough to pay our way. They have the money.
Top 50% get 87% (agi) of Income and pay 13.5% Tax Rate.
Bottom 50% or 70,000,000 workers get 13% not enough to pay much in taxes.
They pay a greater percent of that Income in payroll- state-local taxes than many top incomes.
It has been a disgrace that top ceos can get enormous increases in pay and many of 70,000,000 cannot get an increase in the minimum wage to better their standard of living.
In A Christian nation I often wonder what Jesus Christ would say to us?

E. Tax Book—burn that sucker. start anew. Any request for an exemption be televised so the public can watch attempts at bribery. It is so sad that in 2011 corporations with record profits paid 12.1% Tax Rate for second lowest in oecd nations. It is sad when we borrow $1300B with $14,000B income.
because we tax only $2300B or 16.4% Tax Rate yet top incomes had huge pay increases.
Job Creators=lowest since Hoover =while rich got ultra rich and masses borrowed from those rich to keep a decent standard of living. While top 10% gained to 73% of Net Wealth—to 83% of Financial Wealth and got 50% of individual income. While 70,000,000 got 13% of income.

F. Tight audits and cut spending on Defense and Medicare the too biggies on unnecessary spending.
Example—In San Francisco, colon exam is $7500 and $1500 in southern calif. hospitals.
This per Head of public employee health care for calif. Example:elevated blood pressure. Two tests. Nitro patch on chest in bed nine hours. $6,000. Yes! $6,000.

clarence swinney

Aug. 8, 2012, 10:29 a.m.

How often did you hear Darn Tax & Spend Democrats.
Republican policy—Spend & Borrow=kids pay tomorrow
Democrat policy—Spend & Tax=pay your way today
Fact Check:
1980-2009—3 R presidents added 9000B to a 1000B Debt
Jobs—The 3 got 99,000 jobs per month
Carter + Clinton got 222,000 per month
Bill Clinton left Bush a 240B surplus.
CBO predicted a 10,000B surplus in 2010 were we to continue Clinton policies.
Bush two unfunded wars; huge tax cuts; unfunded Medicare Part D
took Debt(9-30-01) from 5800B to 11,900 (9-30-09) or 6100B increase-(Doubled)
CBO credits Bush “new” programs for 5100B and Obama “new” programs for 1400B
in debt increase 2001-2010.

Do we want a Romney repeat of that record?

Interesting to read the stats about the Democrats and Republicans. What do you do if you want to get elected? Promise something that voters can have within 4 years, it does not matter for you if they loose it after you leave office, thats is for the next guy. Exhibit A :  I don’t think that it are only the Republicans that get lovely words whispered in their ears by the snake on the tree of financial wisdom. Remember that it was Democrat Bill Clinton who signed the bill for laws in 1994 that opened the floodgates for the creation of incomprehensible profitable financial derivatives?! It goes like this: Financial lobby says: we can promise your voters jobs and money NOW if you…  Anyway, voters, you better vote for the smartes candidate. One smarter than industry lobbies will suffice.

Corruption breeds corruption. Wall Street has been acting like this for the past 85 years. Nothing new. After all, We live in a capitalist democracy. Ronal Reagan, our beloved President, in 1986 took funds out of the Social Security Trust Fund to abil out Savings and Loans!!!

Our highest court has decided that money can walk, talk, and Antonio Scalia, our supposedly Constitutional “scholar”, has made it clear that corporations are owned by individuals. Individuals have money. They can give money to whomever they choose! He thinks that is what the Constitution says and that is the end of story folks!! Forget about the rest. Make sure to make money at any and all costs!! That is all.

Everybody who doesn’t like money, raise your hand.
Everyone who thinks CDO ratings were reliable, raise your hand.
Everyone who wants to fix the problem instead of blaming or venting, raise your hand.
Let’s count the hands….

Alessandro Machi

Aug. 11, 2012, 12:48 a.m.

Since I started the Debt Neutrality Blog,, every single day there is a different country in the world that has a story about how consumer debt is handicapping their own economy.

I suggest that simply getting outraged over what bankers on wall street do may ultimately be a time waste.  What do you want?  Do you really want the system to go on as is, only now people will go to jail?

Why not reduce the role of the wall street bad guys in our lives instead?  Please consider signing the Debt Neutrality petition.

These reports address what the banks did after the Senate Banking Committee forced them through Fannie Mae and Freddie Mac, to make mortgages that the banks would have otherwise never considered making.  The full responsibility for the melt down falls on the Senate Banking Committee and FM & FM.  President Bush tried several times to prevent the sitution but was shot down by Barney Frank, Chris Dodd, et al.

I think what I posted to somewhere including overseas locations somewhat relates to this matter we are discussing here, if you want to dig deeper.
Posted on August 13, 2012 at 4:40 am (Local time in the overseas).

Of course God is working silently and above all. Amedinajads should hold the lid of ‘the steam of unhealhy drink’ -kettle tight enough not to contaminate the air of neighborhood or just replace the drink with the popular one of the evolving young generation. Days of religion based politics are now coming to end faster than ever.
No matter where in the digitally connected one new world, the belief blind mullah type minds are bound to fail everywhere. Libya, Egypt, fiture’s Syria etc. are new examples. And the so thought ‘self declared earthly lords’ love these Mullahs with global links and even advise or help them to survive dominantly. There are many reasons behind including the fact that those so called funny lords are of similar mentalities like dumb Mullahs and only difference is, unlike the latter the ‘house(s) of lords with royal flavour all over the world and mainly Europe’ have home-trained law professionals at their back, something like hypnotically conditoned in mind by symbolical or diabolical things such as picture image (e.g. Saddam’s billboards), black rod etc. -that are busy in the so called divine type confusing congregational meetings held in secret of which the purpose is “good for nothing eventually but only monetary gains for a group of own families” –Shahislam.

I wonder where Mr. Prusko worked before Magnetar?

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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