Journalism in the Public Interest

U.S. Senate Investigation Gives New Details on Magnetar

Citing reports by ProPublica, lawmakers describe the hedge fund’s role in the collateralized debt obligations business.


Senate Armed Services Chairman Carl Levin, D-Mich., and ranking Republican Sen. Tom Coburn, R-Okla., arrive at the briefing on the Senate Homeland Security and Government Affairs Committee Permanent Investigations Subcommittee's new report, Wall Street and the Financial Crisis: Anatomy of a Financial Collapse, on April 13, 2011. (Douglas Graham/Roll Call)

A bipartisan report by the U.S. Senate's Permanent Subcommittee on Investigations adds new detail on the activities of the hedge fund Magnetar and its role in helping to create more than $40 billion in mortgage-backed securities, most of which failed disastrously. ProPublica first wrote about Magnetar in April of last year and the story is cited several times in the Senate report.

The report is the culmination of a two-year Senate investigation into the origins of the 2008 financial crisis. It largely takes a case study approach, focusing on mortgage lender Washington Mutual, its regulator, the Office of Thrift Supervision, two credit rating agencies (Moody's and Standard & Poor's), and two investment banks, Goldman Sachs and Deutsche Bank. The investment bank section focuses on the profitable business of collateralized debt obligations. Between 2004 and 2008, U.S. financial institutions issued $1.4 trillion worth of CDO securities. Deutsche and Goldman were notable in the business for aggressive bets against CDOs, as was Magnetar.

The Senate report quotes candid emails from a Deutsche Bank official, Greg Lippmann, discussing Magnetar's strategy.

Lippmann explains how Magnetar was willing to buy the risky and difficult-to-sell bottom part of collateralized debt obligations in order to bet against the parts higher up in the capital structure, describing its strategy as "a bit devious."

In response to ProPublica's earlier report, Magnetar has said that it did not have a bearish view of the market nor did it have a plan to short the housing market. A Magnetar spokesman declined to comment today on the Senate report.

The report focuses extensively on efforts by Goldman Sachs to short CDOs in 2007. Included in the Goldman section is an email from an employee at the bank, Deeb Salem, discussing the possibility of buying a “bunch of the CDO protection” from Magnetar.

In a January 2007 email concerning a CDO called Abacus, Goldman trader Fabrice Tourre details how much CDO managers generally earned on Magnetar deals as a benchmark. These fees could range from $2 million to $3 million, based on Tourre's estimate. Banks could earn from $5 million to $10 million per transaction.

The SEC sued Goldman over Abacus and settled with the bank for $550 million last year. The agency is currently pursuing civil fraud charges against Tourre, which he denies.

Goldman responded to the Senate report by posting a statement on its website pointing to an internal review the firm conducted on its business practices. "While we disagree with much of the report, we take seriously the issues explored by the Subcommittee," the statement said.

The report shows how secretive and compartmentalized the CDO business became in 2006 and 2007. For example, the report cites a Goldman document describing how investors in Magnetar's deals had few ways to figure out that the securities they were buying were created, in part, by a hedge fund so that it could bet against them.

The report also examines how investors in CDOs started to withdraw from the market toward the end of the boom. Rather than stop the business, the banks found ways to continue it. For instance, the ultimate buyers for key portions of CDOs became other CDOs, a practice described in another ProPublica story.

"Rampant conflicts of interest are the threads that run through every chapter of this sordid story," said Subcommittee Chairman Senator Carl Levin.

Correction (April 15, 2011): An earlier version of this story incorrectly attributed an additional email to Greg Lippmann and quoted from that email as referring to Magnetar when in fact it was referring to another hedge fund.

How many times and centuries will we let Goldman Sachs destroy our country? Isn’t it finally time for indictments?

My oh My! The citizens of the U.S. of A. must be a sharp bunch to continue to let this happen.

David P. Matthews

April 20, 2011, 1:20 p.m.

The irony is, that even as we ooh and ah over the CDO swindle there are young guns around the world developing new cons that will make CDOs seem like a game of junior Monopoly. The short selling of anything should be among the most heavily regulated financial activities in the world.

Thank you ProPublica. Great article! Great reading! Few other seem to have the courage to write about the real truth!

In my continuing research for my own book, I come to the undeniable conclusion that America has been knowingly economically raped by Wall Street and the corruption of our political oversight system.
To be continued.

Most bank behaviors revealed here are truly outrageous - as so many are within Corporate America. But let’s not forget the primary cause for the mortgage crisis : the cult of guilt broadcast daily by the press and the schools about some part of American history, that caused commercial banks,  starting in the Clinton years,  to grant loans to the most unlikely borrowers - if they didn’t want to be accused of racism.  Take out the predation commercial banks were subjected as a result of the triumph of political correctness - you can remove the 2008 crisis as well.

Bertrand…...really? you think Clinton was able to convince the banks to loan money to undeserving borrower?  We cannot convince the banks to do the right thing right now? Or really do anything….so how is it Clinton strong armed them into loaning money to these people?

Is it possible the banks wanted to loan money to make hand over fist betting against the loans they just sold knowing they were going to fail? AIG ring a bell? We cannot get the banks to do anything right now, what makes you think Clinton was able to get the banks to loan money to people who don’t deserve the loans?  It is all about greed and money…..they found a way to make more money…. fraudulently I might add.

The original ProPublica article about Magnetar said, “Even today, bankers and managers speak with awe at the elegance of the Magnetar Trade.”

Herein lies the problem.  As I learned in “Liar’s Poker” by Michael Lewis years ago, there are a bunch of socially-unconcious 21+year olds being lauded by their Wall Street “pimps” for selling securities like this.  Greed has no end if it’s not strongly reglated and those regulations enforced.  Any halfway intelligent person knows that when you start messing with the American housing market, and putting millions of average Americans at risk, you will have a meltdown of epic proportions as we did.  The bankers and real estate pros are profiting again by reselling foreclosed properties.  It’s plain, simple theft and fraud.  If nothing else, hedge funds that affect the housing market should be illegal.

Janice Dunham

May 2, 2011, 10:21 p.m.

Sorry to say that if you guys had not won the Pulitzer I would never have known any of this—I’m still a print junky. Kind of scary what I am missing I guess.

Unbelievable. Thanks for this great article. These people need to be locked up until the end of their days. S.

I believe the crux of the issue has not been discussed thoroughly.  I believe the deregulation of the finance industry and the creation of an unregulated CDS market is the cause of our financial crisis.

I don’t think Magnestar and Goldman are the culprits just because they profited immensely from the entire financial debacle.  After all, their entire impetus for existence is based on making the most money for their clients.  If I were a manager at a hedge fund, I would be stupid not to minimize the risks exposure by “betting” against risky investments by purchasing “insurance” in the form of CDS.  The problem is that CDS, which act as “insurance” for CDO, are not regulated as “insurance.”  They didn’t have to be funded properly by charging enough premium to cover their claims.  Thus creating an environment where even the riskiest CDO presented no perceived risk to the owners while the premiums paid to mitigate the risks were still low enough for a handsome return.  Suddenly there are no risks in holding these risky CDO and the only American thing to do is to sell more of them.  If we were to blame Magnetar and Goldman for being greedy, I think everyone who invested in real estate are complicit in creating this financial disaster.

If the CDS were regulated properly to fund all claims, much higher premiums would be charged to transfer the risk and the equity CDO would not look like such a good investment.  The insurance industry is one of the most heavily regulated industry in the country.  If the CDS were to behave as insurance, they should be regulated as such.

tadpole smith

May 3, 2011, 6:24 p.m.

blame acorn not the 3.7 million in lobbyist fees to deregulate that part of finance or that acorn had a class action suit about the predatory lending dating to 2001 or taking these risky loans folding them in to get a triple aaa rating. blame the home owner for thinking his house value would go another 130% in the next 15-20 years.flash trading nothing made or created what we are reaching for that is not representive of actual work energy

As long as we have Republicans totally bought and paid for by Wall Street and who also have only economic theme song: lower taxes on the rich and corporations and all our problems will be solved, we will continue to see the criminality of banks and wall street firms unchallenged. It is one reason why Elizabeth Warren must never have the authority to protect consumers.

Just waiting for the next bubble to burst, then the next, and the next (ad infinitum).

Without “effective” regulation, I predict another bursting of the bubble just before or after the 2012 elections.  Oh, how the middle-class will pay through the nose, again.  Let Elizabeth Warren do her job and we might avoid future insanity.

Daddy Warbucks

May 8, 2011, 5:41 p.m.

After a solid week of non-stop coverage of the Osama bin Laden kill it’s a wonder that any Americans know anything at all about how the banks run this country.  The main stream media ignores stories like this.

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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