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.”