Ain’t capitalism grand? Hedge fund created assets designed to fail

Magnetar created deliberately arcane and risky securities then bet against them, making a fortune in the process. Their actions almost certainly made the real estate bubble bigger and the subsequent crash even worse. Not that the parasite financial class cares about that.

Propublica has an eight-part series on how Magnetar made huge returns and left a $40 billion pile of worthless securities, which the taxpayers eventually would help pay for.

The hedge fund bought the riskiest portion of a kind of securities known as collateralized debt obligations — CDOs. If housing prices kept rising, this would provide a solid return for many years. But that’s not what hedge funds are after. They want outsized gains, the sooner the better, and Magnetar set itself up for a huge win: It placed bets that portions of its own deals would fail.

Along the way, it did something to enhance the chances of that happening, according to several people with direct knowledge of the deals. They say Magnetar pressed to include riskier assets in their CDOs that would make the investments more vulnerable to failure.

In the meantime, lots of investment bankers made millions on the fees and on shorting the securities. Under our non-existent laws and regulations, all of this might well have been legal. Parasitical, slimy, devoid of ethics and integrity, aided by disemboweling government regulatory agencies and buying off members of Congress, but “legal” in the deranged system that passes for justice in America today. In a better world, these folks would be stripped of assets then thrown in prison.

Yves Smith, a prominent financial blogger who has reported on aspects of the Magnetar Trade, writes in her new book, “Econned,” that “Magnetar went into the business of creating subprime CDOs on an unheard of scale. If the world had been spared their cunning, the insanity of 2006-2007 would have been less extreme and the unwinding milder.”

  • willymack

    To paraphrase sarah palin, “How’s that cannibalistic capitalism thing workin’ out fer ya?”
    How gravely wounded do ordinary citizens have to be to WAKE UP and refuse to go along with corporate crooks?
    Are the bush “freedom zones” still in effect, or what?

  • “How gravely wounded do ordinary citizens have to be to WAKE UP and refuse to go along with corporate crooks?” Ordinary citizens don’t have the money, the media time, or the basic powers to keep Wall Street and Congress in check. Hedge funds can quietly influence most any stock in an invisible and non transparent fashion. I play the small cap sector using to try and find the ones that aren’t being toyed around with or structured to fail.

    • DJ

      “Ordinary citizens don’t have the money, the media time, or the basic powers to keep Wall Street and Congress in check.”

      Actually, I believe we do. Why invest in Wall Street at all? I’ve pulled almost all my savings out of stocks and stock-based mutual funds, and put them instead into local investments.

      More to the point, how many national or multi-national corporations are we really forced to buy from? My internet company, my grocery store, and my ranch supplier are all in-state companies. With eBay and the internet, I deal with small companies all over the country, and occasionally in Canada (when I can’t find what I need closer to home). I patronize the farmers market when it’s in season. And I just found a local CSA. My bank is locally-owned. When I go to a coffee shop, it’s not Starbucks, it’s a local place. I eat in local restaurants and avoid fast food chains– the local burrito place makes better food cheaper anyway.

      Yes, I still patronize Home Depot and Verizon and a couple of national insurance companies. But I do my best to keep my money as close to home as possible. I’d much rather give my money to a farmer directly, or to locally-owned Luna Market, or Utah-based Associated Foods, than to Wal-Mart. And if there’s a locally-owned market in Cedar City (pop. 30,000), I bet most people live in communities where there are plenty of locally-owned specialty and ethnic markets they could shop at.

      Wall Street wants us to believe they are indispensable. By voting with our wallets, we can show them they are pretty irrelevant.

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